Singapore, April 20, 2020 -- Moody's Investors Service has affirmed Sri Rejeki Isman Tbk (P.T.)
(Sritex)'s corporate family rating (CFR) of Ba3.
In addition, Moody's has affirmed the Ba3 ratings on:
(1) the $150 million senior unsecured notes due in 2024,
issued by Golden Legacy Pte. Ltd. and unconditionally and
irrevocably guaranteed by Sritex and its subsidiaries, and (2) the
$225 million senior unsecured notes due in 2025, issued by
Sritex and unconditionally and irrevocably guaranteed by all its operating
subsidiaries.
Moody's has also revised the outlook on these ratings to negative
from stable.
RATINGS RATIONALE
"The negative outlook reflects our expectation that diminished consumer
spending on apparel and footwear globally as a result of the coronavirus
outbreak will reduce Sritex's earnings and increase its working
capital needs through 2020," says Stephanie Cheong,
a Moody's Analyst.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. Sritex is exposed to the
retail industry which has been significantly affected by the shock given
its sensitivity to demand and sentiment.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action reflects the impact on Sritex of the
breadth and severity of the shock, and the broad deterioration in
credit quality it has triggered.
"How the pressure from the sharp contraction in discretionary spending
will be distributed along the value chain of retailers, distributors
and suppliers like Sritex remains uncertain. But in our view,
Sritex's products like yarn and greige, which make up half
of its total revenues, are particularly vulnerable as their sales
not under committed contracts and could fall away quickly in case of prolonged
lockdowns across the world," adds Cheong.
Sritex's garment sales should be largely stable as the company is
able to pivot its garment production to other revenue channels,
such as the production of masks and medical jumpsuits, which should
offset expected declines in its apparel sales.
Moody's base case assumes a 25% decline in EBITDA in 2020,
leading to Sritex's debt/EBITDA and EBITA/interest expenses weakening
to around 5.2x and 1.5x respectively in 2020. A moderate
rebound in consumer demand when the virus is contained should support
deleveraging to around 4.0x in 2021, a level more in line
with its Ba3 rating.
The negative outlook also reflects Moody's view that the negative
impact on revenues and working capital may become more severe than currently
expected, because of the unpredictable nature of the current operating
environment.
"Nevertheless, the rating affirmations reflect our expectation
that the company will have adequate liquidity to absorb negative operating
cash flow over the next two to three quarters," says Cheong.
Sritex's large cash balance of $168 million at the end of
2019, along with around $102 million of availability under
committed credit facilities, will be more than sufficient to cover
its upcoming $116 million of debt maturities in 2020. These
include (1) $30 million and $10 million of medium term notes
due in November and December 2020; (2) $8 million of scheduled
debt repayments; and (3) $68 million of short-term
working capital loans which Sritex plans to rollover.
Sritex's Ba3 rating continues to reflect its vertically integrated
operations and leading market position among Indonesian textile manufacturers.
The ratings also incorporate governance risk arising from the company's
concentrated ownership structure and related party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a ratings upgrade is unlikely over the
next 12-18 months. Nevertheless, the outlook could
return to stable if the operating environment improves significantly over
the next 12 months and Sritex maintains healthy credit metrics,
such that its adjusted debt/EBITDA remains well below 4.5x and
EBITA/interest expense stays above 2.5x.
Moody's could downgrade the ratings if the negative impact on revenues
and working capital becomes more severe than currently expected,
such that its adjusted debt/EBITDA remains above 4.5x and EBITA/interest
expense stays below 2.5x for a sustained period of time.
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Sri Rejeki Isman Tbk (P.T.) (Sritex), based in Central
Java, Indonesia, is a vertically integrated manufacturer of
yarn, greige (raw fabric), finished fabric and apparel,
including uniforms and retail clothing. The company's operations
are spread across 25 factories, consisting of nine spinning plants,
three weaving plants, five finishing plants and eight garment plants.
Net revenue generated by the company's four divisions amounted to around
$1.2 billion in 2019.
Sritex is majority owned by the Lukminto family (60.11%).
Iwan Setiawan Lukminto, son of founder H.M Lukminto,
has been the company's president director since 2006. The
family overseas the day-to-day control of operations.
The remaining 39.89% share of the company is publicly traded
on the Indonesian Stock Exchange.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Stephanie Cheong
Analyst
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
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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