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Rating Action:

Moody's assigns first-time B2 CFR to Spindo; outlook stable

01 Sep 2017

Singapore, September 01, 2017 -- Moody's Investors Service has assigned a first-time B2 corporate family rating (CFR) to Steel Pipe Industry of Indonesia Tbk (P.T.) (Spindo).

At the same time, Moody's has assigned a B2 rating to the proposed senior notes due 2022. The notes will be issued by Spindo's wholly owned subsidiary, Spindo B.V., and guaranteed by Spindo and its 90%-owned subsidiary, PT Spindo Engineering Industry, which together own substantially all assets of Spindo.

The ratings outlook is stable.

Proceeds of the notes issuance will be primarily used to repay existing indebtedness.

RATINGS RATIONALE

"The B2 CFR reflects Spindo's leading market position in the Indonesian steel pipe manufacturing industry, solid end-market diversification, and success in passing steel price volatility to customers; thereby supporting solid EBITDA margins of between 15% and 19% in recent years," says Brian Grieser, a Moody's Vice President and Senior Credit Officer.

"The B2 CFR also reflects Spindo's small scale relative to rating peers, high working capital investment needs, volatility in quarterly gross margins, and exposure to global and domestic steel price fluctuations," adds Grieser.

While Spindo's quarterly gross margins can be volatile, its cost plus pricing model is effective in stabilizing its margins when viewed over a longer timeframe, such as 12 months.

Moody's expects that Spindo's debt-to-EBITDA will range between 4.0x and 5.0x over the next two years; which is commensurate with a B2 CFR.

The CFR incorporates Moody's view that Spindo will maintain low cash balances, and as such will likely rely on a portion of its $100 million in short-term bank credit facilities to manage its interim working capital needs in 2017 and 2018.

In 2016, inventory days on hand increased to around 350, as infrastructure sales growth did not materialize to levels projected by management, resulting in negative cash flow from operations for the second time in the last four years.

While Moody's expects that working capital needs will intermittently pressure cash flows, Moody's anticipates that capital expenditures will fall in 2017 and 2018, which should alleviate these pressures on cash flow generation. Capital expenditures will be allocated largely to the construction of warehouses to expand Spindo's direct sales reach in Indonesia (Baa3 positive).

Spindo manufactures carbon and stainless steel pipes used in the construction, infrastructure, utilities, oil and gas, furniture and automotive industries. While sales to the oil and gas sector deteriorated in recent years — as oil prices and investment in the industry fell — Spindo's sales were resilient due to the strength of growth in its other end markets; highlighting the benefits of its end market diversification.

Moody's views Spindo's leading market position as defensible, given its scale, brand recognition, and broad customer base when compared to Indonesian competitors. High barriers to entry for foreign competitors — such as local content requirements on government contracts and higher shipping costs — also protect Spindo's market position.

The stable ratings outlook reflects Moody's expectation that Spindo will successfully manage down inventory levels from 2016 highs and continue to generate solid profitability levels, despite fluctuations in steel prices. The stable outlook also reflects Moody's expectation of improved demand, in line with GDP growth in Indonesia, as well as increasing infrastructure investments in 2017 and 2018.

The B2 rating on the backed senior unsecured notes factors in Moody's expectation that these notes will represent the large majority of debt in Spindo's capital structure over the next 12-24 months.

The ratings could be upgraded if the company successfully expands its warehouse infrastructure, while also improving inventory turnover levels. Indicators of an upgrade include a situation in which Spindo: 1) consistently generates positive cash flow from operations; 2) establishes a track record of maintaining leverage levels such that its adjusted debt-to-EBITDA falls below 4.0x; and 3) maintains EBITDA margins in the high teens.

The ratings could be downgraded if inventory turnover levels weaken and/or borrowings on the working capital facilities approach $100 million limit.

Moreover, persistently negative cash flow from operations, weakening demand from key end markets, or leverage levels above 5.0x over an extended period could also lead to a downgrade.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Steel Pipe Industry of Indonesia Tbk (P.T.) (Spindo) is a leading steel pipe manufacturer in Indonesia, producing a variety of customized and standardized carbon and stainless steel pipes and pipe-related products and services. Spindo's products are used by customers in the construction, infrastructure, utilities, oil and gas, furniture and automotive industries, and are sold under the Spindo and Tetsura brands.

Spindo operates six manufacturing facilities in Indonesia, with a total of 37 steel pipe production lines.

The company listed on the Indonesia Stock Exchange in February 2013. It is 55.94%-owned by PT. Cakra Bhakti Para Putra (unrated) and 44.06% owned by public shareholders.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Brian Grieser
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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