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Rating Action:

Moody's revises outlook on Tunas Baru Lampung to negative

04 May 2020

Singapore, May 04, 2020 -- Moody's Investors Service has affirmed Tunas Baru Lampung Tbk (P.T.)'s (TBLA) Ba3 corporate family rating (CFR), along with the Ba3 rating on the backed senior unsecured bond issued by TBLA International Pte. Ltd., a wholly owned subsidiary of TBLA.

At the same time, Moody's has revised the outlook on these ratings to negative from stable.

RATINGS RATIONALE

"The change in TBLA's outlook to negative from stable reflects our expectation that its credit metrics and liquidity position will remain stretched over the next 12 months, amid a challenging operating environment," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"At the same time, the affirmation of TBLA's Ba3 ratings reflects the favorable long-term domestic demand fundamentals of its dual commodity business of palm oil and sugar," adds Hasnain, who is also Moody's Lead Analyst for TBLA.

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.

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 TBLA of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Moody's estimates that, as a result of muted earnings growth and an increase in debt, TBLA will maintain adjusted debt/EBITDA of 4.0x-4.2x, and adjusted EBITA/interest of 1.6x-1.8x over the next 12-18 months. This would be in breach of the downward triggers for its Ba3 ratings of 4.0x and 2.75x, respectively.

While palm oil and sugar sales could temporarily increase in 1Q 2020 as customers stockpile inventory, earnings growth over the next 12 months will be tempered by slowing economic growth due to the coronavirus outbreak, which will weigh on domestic consumption and disrupt economic activity.

Given the considerable decline in petroleum prices, demand for TBLA's biodiesel, which generated 27% of consolidated revenue in 2019, could decline as the price differential between biodiesel and diesel increases.

This risk is partly mitigated by the contract TBLA has with the state-owned oil and gas company Pertamina (Persero) (P.T.) (Baa2 stable) to sell around 340,000 tons of biodiesel in 2020, up considerably from 217,000 tons sold in 2019. TBLA has not reported any delays or cancellations under this contract thus far.

Moody's expects TBLA's liquidity will remain weak, with TBLA's internal cash sources being insufficient to meet its cash needs over the next 12-15 months. This is primarily driven by TBLA short term debt which gets rolled over each year, and its medium term notes maturing in December 2020 (IDR411 billion) and in March 2021 (IDR239 billion).

While the company has a track record of meeting scheduled maturities, and management has historically been proactive in managing its capital structure, current market conditions could prove challenging for TBLA's refinancing efforts.

TBLA has stated it had IDR2.7 trillion of undrawn short term credit facilities as of 31 December 2019 which can provide temporary liquidity relief. Moody's expects TBLA's banks to continue to roll over these facilities. Any perceived difficulty in TBLA being able to extend these facilities will indicate a deterioration in its liquidity profile, and likely lead to a negative ratings action.

Any weakness in earnings will also reduce headroom under financial maintenance covenants on TBLA's bank loans. In particular, Moody's estimates TBLA will have minimal headroom under its debt service coverage ratio of above 120% on some of its bank loans by the end of 2020.

The rating also considers TBLA's exposure to environmental, social and governance (ESG) risks as follows.

Firstly, the rating considers the increasing stakeholder scrutiny around environmental and social risks associated with the palm oil sector. To help mitigate these risks, TBLA is pursuing a number of initiatives including land and water management, and community and labor relations.

TBLA also has two cooking oil refineries and one kernel-crushing plant certified by the Roundtable on Sustainable Palm Oil (RSPO). The RSPO is an association of palm oil industry stakeholders that promotes the growth and use of sustainable palm oil products

However, unlike the other palm oil companies that Moody's rates, TBLA is not seeking RSPO certification for all its palm oil estates and processing facilities. Around 75% of its palm oil products are sold domestically, where customer demand for RSPO-certified palm oil is lower than that in importing countries, although this could change over time.

Secondly, with respect to governance, while TBLA has a concentrated ownership structure, this is balanced by its listed status, long operating track record and Moody's expectation that TBLA will maintain conservative financial policies in terms of debt-funded capital spending and shareholder returns.

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

An upgrade of TBLA's ratings is unlikely over the next 12-18 months, given the negative outlook.

The outlook could return to stable if TBLA (1) increases earnings and strengthens its credit metrics; and (2) improves its liquidity such that its cash sources are sufficient to meet its planned needs over the next 12 months, with sufficient headroom remaining under its financial covenants.

Specific indicators that Moody's would consider for a change in outlook to stable include adjusted debt/EBITDA staying below 4.0x and adjusted EBITA/interest expense above 2.75x, on a sustained basis.

Moody's could downgrade the ratings if (1) TBLA is unable to grow earnings or deviates from its stated prudent financial policies; (2) palm oil and sugar prices or sales volumes decline, leading to protracted weakness in TBLA's financial metrics; or (3) there is a deterioration in TBLA's liquidity, including any perceived delays in its proactively refinancing near-term debt maturities, a reduction in its undrawn credit facilities, or a further reduction in headroom under its financial covenants.

Specific indicators for a downgrade include adjusted debt/EBITDA above 4.0x and adjusted EBITA/interest expense below 2.75x on a sustained basis.

The principal methodology used in these ratings was Protein and Agriculture published in May 2019 and available at https://www.moodys.com/research/Protein-and-Agriculture--PBC_1113389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jakarta and incorporated in 1973, Tunas Baru Lampung Tbk (P.T.) (TBLA) is a producer of palm oil and sugar products. As of 31 December 2019, TBLA was 28%-owned by Sungai Budi (P.T.) and 27%-owned by Budi Delta Swakarya (P.T.). These two major shareholders are equally owned by Mr. Widarto, who serves as the executive chairman of TBLA, and Mr. Santoso Winata, who is the president commissioner of TBLA.

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.

Maisam Hasnain, CFA
Asst Vice President - 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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