Singapore, April 10, 2019 -- Moody's Investors Service has changed to negative from stable the
outlook on the ratings of Gajah Tunggal Tbk (P.T.) (GJTL).
At the same time, Moody's has affirmed the B2 corporate family
rating of GJTL as well as the B2 rating on GJTL's $250 million
senior secured notes due August 2022
RATINGS RATIONALE
"The negative outlook reflects our expectation that GJTL's credit
profile will remain weak for its B2 ratings over the next 12-18
months, as its largely unmitigated exposure to volatile raw material
input costs and currency exchange rates in Indonesia will continue to
weigh on its margins," says Brian Grieser, a Moody's
Vice President and Senior Credit Officer.
GJTL's leverage -- as measured by debt/EBITDA -- has breached
the downward rating trigger of 4.5x for its B2 ratings.
Adjusted leverage increased to 5.1x in 2018 from 4.8x in
2017, due to lower earnings on the back of a weaker rupiah and a
sharp rise in carbon black prices in 2018. 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.
Solid revenue growth, both domestically and via exports, have
yet to fully mitigate the pressure on margins driven by a weaker rupiah
and higher commodity prices in 2018. As a result, EBITDA
margins have fallen to 12.5%, the lowest level in
the last five years.
That said, lower carbon black prices, manageable natural and
synthetic rubber prices, and the strengthening of the rupiah versus
2018 highs should support margin improvement in 2019.
"We expect cash flows to be somewhat stronger in 2019 as investments
in working capital subside. However, we expect substantially
all cash flows to be used to fund debt service requirements and capital
spending, leaving little buffer in the event of further raw material
cost or currency volatility," says Grieser, who is Moody's
lead analyst for GJTL.
The company has large debt amortization payments of $12.5
million each quarter under its syndicated bank loan, which will
step up to $15.6 million each quarter from July 2020 onwards.
Moody's expects GJTL will continue to rely on short-term
working capital facilities in 2019. The ratings underpin Moody's
expectations that GJTL will successfully extend working capital facilities,
which mature in August 2019.
Nonetheless, the affirmation of GJTL's B2 ratings continues
to reflect the company's (1) leading market position in the Indonesian
bias and motorcycle replacement tire market; (2) balanced product
mix among radial, bias and motorcycle tires; and (3) solid
geographic diversification of sales.
A downgrade would likely occur if EBITDA margins remain below 15%
in 2019 owing to increased raw material, transportation and logistics
costs, a weaker currency, or if debt/EBITDA remains over 4.5x.
Further, a deterioration in liquidity, either due to declining
cash balances, a failure to meet covenant requirements, or
an inability to renew its short-term working capital facilities
in a timely manner would also lead to a downgrade.
The ratings are unlikely to be upgraded in the near term given the negative
outlook. However, the outlook on the ratings could return
to stable if GJTL continues to grow its revenue base while maintaining
its EBITDA margin around 15%, generating positive free cash
flow and reducing debt levels. Further, a return of the outlook
to stable would require GJTL to maintain its 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 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 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