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Rating Action:

Moody's downgrades Sritex to B3; ratings remain on review for further downgrade

22 Mar 2021

Singapore, March 22, 2021 -- Moody's Investors Service has downgraded Sri Rejeki Isman Tbk (P.T.)'s (Sritex) corporate family rating (CFR) to B3 from B1.

Moody's has also downgraded to B3 from B1 the ratings on: (1) the $150 million backed 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 of its operating subsidiaries.

All ratings remain under review for further downgrade.

"The downgrade reflects Sritex's persistently weak liquidity and heightened refinancing risks given ongoing and material further delays with its loan extension exercise," says Stephanie Cheong, a Moody's Analyst and the Lead Analyst for Sritex.

The review for further downgrade reflects continued uncertainties relating to its refinancing plans.

The ratings review will focus on Sritex's progress on addressing its upcoming debt maturities. More specifically, the review will focus on (1) the progress of Sritex's discussions with its lenders to extend the maturity date on its syndicated loan; (2) the progress of Sritex's discussions with lenders on new bilateral loans; (3) Sritex's ability to renew its short-term working capital lines that will expire through 2021; (4) Sritex's working capital management and ability to generate cash flows; and (5) the execution of any alternative funding plans.

Moody's expects to conclude the review within 60 days.

RATINGS RATIONALE

Sritex faces high refinancing risk given its weak liquidity position and large amounts of debt maturing over the coming quarters. Sritex's continued reliance on banks for its refinancing needs leaves it vulnerable to funding conditions, which have weakened amid negative sentiment on the textile sector in Indonesia.

On 2 November 2020, Sritex submitted a request to its lenders for a 2-year extension on its $350 million syndicated loan maturing in January 2022. Its lenders had until 1 March 2021, an extension from the first deadline of 2 February, to respond to the extension request. However, a definitive agreement for the 2-year extension has yet to appear, which increasingly weighs on Sritex's credit profile.

Concurrently, the company has been negotiating refinancing arrangements with existing lenders to address any potential funding gap. However, firm agreements are yet to be put in place.

Sritex's cash holdings of $159 million as of 30 September 2020 and expected free cash flow of around $50 million over the next 15 months will not be sufficient to cover its upcoming debt obligations of: (1) $350 million syndicated loan due January 2022; (2) $65 million medium-term notes, of which $40 million has been paid in the fourth quarter of 2020 and $25 million will be due in Q2 2021; (3) $15 million of debt amortization payments; and (4) $174 million outstanding under short-term working capital lines as of 30 September 2020.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given today's rating action, an upgrade is unlikely in the short term. However, the ratings could be confirmed if Sritex successfully addresses its upcoming maturities and materially improves its liquidity and debt structure.

On the other hand, the ratings are likely to be downgraded further if Sritex fails to put in place a concrete refinancing plan in the near term or if Sritex's liquidity deteriorates further, either because of (1) falling cash balances, (2) increasing short-term working capital debt, (3) a loss in access to working capital lines, or (4) if working capital fails to unwind over the next few quarters.

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, the son of founder H.M Lukminto, has been the company's president director since 2006. The family oversees the day-to-day 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_1243406.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.
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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