Singapore, March 31, 2020 -- Moody's Investors Service, ("Moody's") has
downgraded the corporate family rating (CFR) of Gajah Tunggal Tbk (P.T.)
(GJTL) to Caa1 from B3.
At the same time, Moody's has downgraded the rating on GJTL's
$250 million senior secured notes due in August 2022 to Caa1 from
B3.
The outlook is negative.
RATINGS RATIONALE
"The downgrade to Caa1 reflects our expectation that GJTL's
largely unmitigated exposure to the weakening Indonesian rupiah,
if sustained, will drive up debt and weaken EBITDA margins",
says Stephanie Cheong, a Moody's Analyst, "This in turn
will dampen profitability, reduce cash flows and further increase
its reliance on short-term funding."
GJTL's revenues are largely denominated in Indonesian rupiah,
but almost all of its raw material costs, debt and debt service
obligations are denominated in or linked to the US dollar. Moody's
expects every 10% decline in the Indonesian rupiah against the
US dollar will lower GJTL's EBITDA margins by around 2%.
Of GJTL's $397 million long-term US dollar debt,
only $184 million was hedged at 30 September 2019. Furthermore,
the hedges only protect the principal up to IDR14,811 while interest
expense remains unhedged.
"Moreover, GJTL relies heavily on short-term working
capital loans, the majority of which will come due in August 2020,"
says Cheong. "The current volatile capital market conditions
exacerbate the refinancing risk for these loans."
Moody's projects the company's $30 million of cash
flow from operations over the next 12 months together with $46
in cash on its balance sheet at the end of September 2019 will be insufficient
to cover estimated capital expenditures of $30 million and bank
loan amortization payments totaling $53 million. GJTL also
has $86 million outstanding under its short-term revolving
working capital loans, the majority of which will mature in August
2020.
GJTL is required to maintain a maximum net debt/EBITDA ratio and minimum
debt service coverage ratio of 4.50x and 1.05x, respectively,
according to its $250 million senior secured syndicated bank facilities
due August 2022.
At 30 September 2019, the covenant calculations were 4.02x
and 1.09x, respectively, providing little cushion to
absorb shortfalls in EBITDA or rising debt levels stemming from the depreciation
of the Indonesian rupiah. Additionally, these maintenance
covenants will tighten to 4.35x and 1.10x, respectively,
for the period ending March 2020.
In terms of environmental, social and governance (ESG) factors,
the ratings incorporate governance risk arising from the company's concentrated
ownership structure, weak financial management and related party
transactions.
The principal methodology used in these ratings was Automotive Supplier
Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Given the negative outlook, an upgrade is unlikely over the next
12-18 months. However, the outlook could return to
stable if GJTL meaningfully improves its cash flow and liquidity and maintains
sufficient cushion under its bank loan covenants. The company will
also need to successfully roll over upcoming short-term loans and
extend maturities on its working capital facilities to ensure sufficient
liquidity.
Moody's could further downgrade the ratings if (1) GJTL fails to
improve its liquidity, either due to a declining cash balance,
a loss in access to working capital lines, or if it continues to
operate with limited cushion under its maintenance covenants; (2)
GJTL's financial profile deteriorates more severely than expected,
particularly if there is a further weakening in the Indonesian rupiah;
(3) GJTL fails to refinance its $250 million bonds well ahead of
their maturities in 2022.
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 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
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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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 outcome
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
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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
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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.
50 Raffles Place #23-06
Singapore Land Tower
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