Fitch Downgrades Barito Pacific to 'B'; Outlook Stable

(Fitch Ratings - Singapore - 03 Sep 2020)--Fitch Ratings has downgraded Indonesia-based PT Barito Pacific Tbk's Long-Term Issuer Default Rating (IDR) to 'B' from 'B+'. The Outlook is Stable.

The downgrade reflects our revised assessment of Barito's group credit profile to 'b+' from 'bb-', due to an increase in the group's net leverage and weakening holdco EBITDA interest cover. Barito, being a holding company, relies on cash upstreaming from PT Chandra Asri Petrochemical Tbk (CAP, BB-/Stable) and Star Energy Group Holdings Pte Limited. Fitch rates Barito one notch below the group credit profile (with CAP and Star Energy proportionately consolidated), given its fractured shareholding in the key business - CAP and Star Energy - and cash flow subordination arising from restrictive covenants on debt at the operating entities.

The weakening in Barito group's net leverage and the holdco interest cover is driven mainly by additional borrowing of a USD253 million loan raised at the holdco for its share of a joint venture (JV) investment - in the Java9 &10 power project (PT Indo Raya Tenaga (IRT)). We had earlier expected that any mezzanine financing for this power project would be done at the project SPV level on a non-recourse basis. The metrics are also weakened by our expectation of tighter petrochemical product spreads at CAP leading to lower EBITDA and consequently lower dividend payouts by CAP.

Fitch has reassessed the linkage between Barito and its 47%-owned subsidiary CAP as 'Weak', under our Parent and Subsidiary Rating Linkage Criteria, on evidence of effective ringfencing to prevent material cash leakage from CAP to the parent. We believe CAP has limited headroom under its bond covenants to make restricted payments, which are not sufficient to support higher interest cover at the holdco.

Barito's rating benefits from its diversified presence across the petrochemical and energy sectors, its leading market position as Indonesia's largest petrochemical producer and strong record in geothermal operations, with long-term contracts driving stable revenue.

KEY RATING DRIVERS

Additional Debt to Weaken Metrics: Barito's has availed a USD253 million facility to be on-lent to fund its part of shareholder loan in the 2GW coal-based power IRT project, in which Barito holds 34%. The balance is held by state power utility PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) subsidiary PT Indonesian Power with 51% and Korea Electric Power Corporation (AA-/Stable) with 15%. According to Barito, the loan is a pass-through and IRT will reimburse the financing costs and principal to the company after the completion of the project in four to five years. However, the timing mismatch results in pressure on Barito's cash flow and the group's leverage.

Lower Holdco Interest Cover: We expect Barito holdco's interest cover will weaken to 0.4x in 2021 (2019: 0.7x; 2020: -0.3x), against our earlier expectation of 1.1x, driven largely by a first-time drawdown of USD184 million from a USD253 million term loan facility, with the remaining USD69 million drawdown scheduled in 2025. This will increase Barito holdco's total borrowings to about USD440 million by end-2020, against USD300 million in 2019. Holdco's interest cover is also affected by our expectation of lower dividends from CAP as tighter petchem spreads hit CAP's profitability.

Consolidated Profile Revised Down: Fitch has revised down its assessment of Barito group's proportionately consolidated credit profile to 'b+' from 'bb-', due to an increase in group net leverage and weakness of holdco interest cover. We expect Barito group's net leverage - measured as net debt/EBITDA with CAP and Star Energy proportionately consolidated - to rise to 5.0x in 2020 (2019: 3.9x) due to an increase in borrowings at the Barito holdco level and our expectation of lower EBITDA generation at CAP.

 

We expect the group's net leverage to decline from 2021 because of a recovery in CAP's operating performance, but it may remain close to or above our previous downgrade trigger. Lower interest cover than Fitch had expected for Barito holdco over the next two to three years and higher refinancing requirements will add to the pressure on the group credit profile.

Fractured Shareholding; Structural Subordination: Barito's access to the cash flow of CAP and Star Energy is limited by its shareholding structure. Barito effectively holds 47% of CAP and, through its 67% holding of Star Energy, effectively owns between 35%-40% of Star Energy's operating assets. The shareholding structure results in significant leakage of dividends to minorities, and the covenants on the debt at operating entities limit cash leakage and lead to structural subordination. As such, we rate Barito one notch below the group credit profile.

Weak Linkage with CAP: We have revised the assessment of the linkage between CAP and its largest shareholder, Barito, to 'Weak' from 'Moderate', driven by a divergence of their financial profiles and evidence of ringfencing to prevent material cash leakage. CAP's capacity to make restricted payments under the bond covenants is based on 50% of consolidated net income, which is quite modest and has declined due to a net loss in 1H20. CAP did not pay any final dividends during 1H20 due to weak product spreads. Instead, CAP used part of its cash balance of about USD650 million to prepay long-term borrowings, whereas we expect the borrowings at Barito holdco to go up.

In addition, we believe that the independence of CAP's financial policies is also supported by the presence of a significant minority shareholder in SCG Chemicals Company Limited, which has 31% stake in CAP and an equal representation as Barito on CAP's board. As a result, we rate CAP based on its Standalone Credit Profile (SCP) of 'bb-'. We will constrain CAP's rating at a maximum of one notch above Barito's group credit profile because of the potential impact on CAP's financing, should the parent's credit profile deteriorate.

Diversified Businesses: Barito's investments are diversified among petrochemicals through CAP, and power through Star Energy, the largest Indonesian geothermal energy producer. We expect Barito to continue to benefit from CAP's dividends, which could be volatile, and modest-but-improving dividends from Star Energy.

CAP - Moderate Spreads: We expect spreads to stay low for most petrochemical products affected by demand reduction amid the coronavirus pandemic as well as supply concerns from global capacity additions. Average product spreads fell sharply in 1H20, resulting in CAP's EBITDA margin falling to 0.5% from 15.6% in 2018. We expect CAP's EBITDA margin to dip to 7.7% in 2020, before improving to 11.3% in 2021 with the stabilisation of supply and demand of petrochemical products.

Stable Geothermal Operation: Star Energy's established operations and its long-term contracts - which have residual terms of 20 years or more - with PLN result in stable revenue and cash flow, enhancing Barito's consolidated credit profile. Star Energy's operations benefit from high availability, inherently low operating costs and the long operating history of its assets. We expect Star Energy's financial performance to be stable with 1H20 EBITDA of USD217 million, against our full-year estimate of USD414 million.

CAP2 Capex Delay: CAP planned to invest about USD300 million initially on its second petrochemical complex (CAP2), out of its total USD430 million capex in 2020. However, the company expects delays in the capex and final investment decision (FID) for CAP2 to be pushed out to 2022 because of coronavirus-related volatility. We expect pre-FID CAP2 capex in 2021 and 2022. We estimate total investment costs for CAP2 to be around USD5 billion, but have only factored in pre-FID capex - mainly land acquisition costs - in our analysis, as the ownership and funding structure for this project are yet to be finalised.

DERIVATION SUMMARY

Barito's ratings reflect its diversified petrochemical and energy businesses - it has the largest petrochemical and geothermal operations in Indonesia. The ratings also factor in Barito's moderate financial profile (with CAP and Star Energy proportionately consolidated), its fractured shareholding in key operating subsidiaries and subordination due to cash flow restrictions arising from debt at its operating subsidiaries.

Golden Energy and Resources Limited's (GEAR, B+/Stable) financial profile is stronger than that of Barito group's financial profile (with CAP and Star Energy proportionately consolidated), with the diversification of Barito's cash flow resulting in the similar assessment of their respective group credit profiles. However, Barito's fractured shareholding and structural subordination results in it being rated one notch below its group credit profile.

In comparison, GEAR is rated at the same level as its 67%-owned coal subsidiary, PT Golden Energy Mines Tbk (GEMS, B+/Stable), reflecting the absence of material debt at GEMS and stronger access to cash flow, as GEMS's policy of high dividend payouts explains the notch difference between GEAR and Barito.

KEY ASSUMPTIONS

- Petrochemical product margins (spreads) of key products to remain moderate in 2020 and improve gradually thereafter

- CAP's dividend payout ratio of 40% from 2021; no payouts in 2020

- Capex of around USD960 million until 2022, of which USD500 million incurred by CAP and the balance by Star Energy

- Star Energy's units operating at an average availability rate of around 94%

- Tariffs in line with PLN's long-term contracts

- Dividend received from Star Energy to increase to USD18 million in 2021 from USD4 million in 2019

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Barito group's credit profile improves to 'bb-', reflected by net leverage - measured as net debt/EBITDA with CAP and Star Energy proportionately consolidated - coming below 3.5x and Barito holdco EBITDA interest cover improving above 1.5x (2019: 0.7x)

- Linkages between Barito and CAP strengthens, provided Barito's group credit profile remains intact

- Barito holdco EBITDA includes dividends from CAP and Star, and holdco interest includes debt at the fully owned subsidiaries

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Barito's holdco liquidity deteriorates, along with a material increase in refinancing risk

- Holdco's EBITDA interest cover is not on track to improve above 1.2x by 2022

- Deterioration in Barito group's credit profile, with proportionately consolidated net leverage exceeding 4.5x for a sustained period

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Manageable Holdco Liquidity: Barito's holdco cash of about USD71 million at end-June 2020, along with expected dividends of USD4 million from Star, would be sufficient to cover its scheduled debt repayment of about USD50 million and interest costs of around USD25 million over the next 12 months. Fitch expects Barito to be able to raise the funds because of its sound access to bank funding and its record of timely fund raising from debt markets.

Barito's receipt of USD114 million in June 2020 from warrants exercised by its two large shareholders supported the rise in cash balance. In addition, Barito raised USD25 million in March 2020 from the Indonesian rupiah bond market, and expects to raise similar amount later in the year. Most of Barito's bank debt is secured against a pledge of part of its shareholding in CAP, but the extent of the pledge is only about a quarter of Barito's shareholding in CAP. This provides enough buffer, even in an event of a fall in CAP's share price.