Singapore, August 15, 2019 -- Moody's Investors Service ("Moody's") has downgraded
the corporate family rating of Gajah Tunggal Tbk (P.T.)
(GJTL) to B3 from B2.
At the same time, Moody's has downgraded the ratings on $250
million of senior secured notes due August 2022 to B3 from B2.
Moody's has also changed the outlook for all ratings to stable from
negative.
RATINGS RATIONALE
"The downgrade primarily reflects GJTL's very weak liquidity
position and debt structure, given its increased reliance on short-term
funding and potential for covenant pressure," says Stephanie
Cheong, a Moody's Analyst.
"The downgrade also reflects the prolonged deterioration in GJTL's
operating performance and our expectation that the company's financial
profile is unlikely to improve materially in 2019," says Cheong,
who is Moody's lead analyst for GJTL. "GJTL's
credit metrics are currently below our tolerance levels for the rating
and will likely remain weaker than the thresholds set for the rating over
the next 12-18 months."
The company reported around $51 million in cash on its balance
sheet at 30 June 2019, against $145 million of debt coming
due over the next 12 months, namely, $95 million of
short-term revolving working capital loans, of which the
facilities mature over October 2019 to February 2020, and large
debt amortization payments of $12.5 million per quarter
under its syndicated bank loan, which will step up to $15.6
million each quarter from October 2020 onwards.
Moody's therefore expects GJTL's weak liquidity position will
necessitate a high level of reliance on short-term working capital
facilities in the next 12-18 months in order to meet its basic
cash requirements. Nevertheless the B3 ratings and stable outlook
incorporate Moody's expectation that GJTL will successfully extend
its working capital facilities as and when they come due, in the
absence of which the ratings would likely face further immediate downward
pressure.
GJTL is required to maintain net debt/EBITDA and DSCR of 4.50x
and 1.05x in accordance with the covenants in its $250 million
senior secured loan. As of 30 June 2019, the covenant calculation
was 4.19x and 1.07x, leaving little buffer in the
event of further raw material cost or currency volatility.
The company's operating performance as measured by EBITDA margin
has eroded to 11.6% for the twelve months ending 30 June
2019, the lowest level since 2008. The decline in margins
was driven mainly by a weaker Rupiah as well as raw material cost pressures.
While GJTL reports and earns most of its revenue in IDR, almost
all of its raw material costs and debt obligations are denominated or
linked to USD. As a result, the company's leverage
-- as measured by debt/EBITDA -- remained high at 5.2x
for the twelve months ending 30 June 2019.
Despite modest growth in revenues, rising rubber prices in 1H 2019
and current Rupiah levels of above 14,000 suggest continued pressures
on margins over the next 12-18 months. As a result,
Moody's does not expect a quick deleveraging for GJTL.
The rating also incorporates governance risks arising from the company's
concentrated ownership structure, weak financial management and
related party transactions.
Nonetheless, GJTL's ratings continue to be supported by the company's
(1) leading market position in the Indonesian bias and motorcycle replacement
tire market; (2) a balanced product mix among radial, bias
and motorcycle tires; and (3) solid geographic diversification of
sales.
A downgrade would likely occur if there is a deterioration in liquidity,
either due to declining cash balances, a loss in access to its working
capital lines or a failure to meet covenant requirements.
The ratings could be upgraded following: (1) an improvement in its
liquidity position such that GJTL increases its covenant cushion and materially
reduces its reliance on short-term funding; and (2) a sustained
improvement in EBITDA margins towards 15%, generating positive
free cash flow and reducing debt levels. Further, an upgrade
would require GJTL to maintain debt/EBITDA below 4.5x.
The principal methodology used in these ratings was Global Automotive
Supplier Industry published in June 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Gajah Tunggal Tbk (P.T.) (GJTL), headquartered in
Jakarta, Indonesia, is Southeast Asia's largest integrated
tire manufacturer, with installed capacity to produce 55,000
passenger car radial (PCR) tires, 14,500 bias tires,
95,000 motorcycle tires, and 2,000 truck and bus radial
(TBR) tires per day. The company also has capacity to produce 40,000
tons and 75,000 tons of tire cord and synthetic rubber per year,
respectively, for both internal consumption and third-party
sales.
GJTL's key shareholders include Denham Pte Ltd (49.5%),
a subsidiary of the Chinese tire manufacturer Giti Tire, and Compagnie
Financiere Michelin SCmA (10%, A3 stable). The remaining
shares are publicly traded on the Indonesian Stock Exchange.
REGULATORY DISCLOSURES
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.
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.
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
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
