Fitch Assigns Pengembang Pelabuhan Indonesia First-Time 'AAA(idn)'; Outlook Stable

(Fitch Ratings-Jakarta-22 August 2019)-- Fitch Ratings has assigned PT Pengembang Pelabuhan Indonesia (PPI) a National Long-Term Rating of 'AAA(idn)'. The Outlook is Stable.

Fitch has assessed that PPI has strong linkages with its controlling shareholder, state-owned port operator PT Pelabuhan Indonesia II (Persero) (Pelindo II, BBB/Stable), under our Parent and Subsidiary Rating Linkage criteria. The assessment reflects Pelindo II's 100% stake in PPI, the operational relationship between Pelindo II and PPI, and their strong legal linkages, which are influenced by a cross-default clause under Pelindo II's bond document. PPI is one of Pelindo II's material subsidiaries as the company's revenue amounts to 7% of the parent's total consolidated revenue. Fitch has assessed the creditworthiness of PPI at 'AAA(idn)', which is equalised with Pelindo II's credit profile.

PPI's Standalone Credit Profile of 'aa+(idn)' reflects its position as part of a primary port of call within its served region of Jakarta and West Java and the protective contractual agreement in its long-term lease business model. This is despite its terminal operator's limited operational record and its capex plan for green-field projects. PPI's debt-raising plan presents some refinancing risks, which are partly mitigated by the parent's relationships in the financial market. However, the debt also has loose covenants and structural features.

'AAA(idn)' National Ratings denote the highest rating assigned by the agency in our National Rating scale for Indonesia. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

KEY RATING DRIVERS

Part of Primary Port and No Exposure to Volume Risk - Revenue Risk (Volume): Stronger

PPI's Container Terminal 1 is part of Tanjung Priok, the primary port of call for Jakarta and West Java that is operated by Pelindo II, which has a dominant container market share with limited competition and mainly origin and destination (O&D) business with limited transshipment cargo. The port accounts for about 37% of container throughput in Indonesia. PPI benefits from a 25-year fixed contractual-income arrangement with PT New Priok Container Terminal One (NPCT1), which operates the terminal. This allows PPI to avoid the risks related to volume fluctuation. The terminal relies on Pelindo II's port infrastructure. Land access to Pelindo II's ports is largely through roads with limited rail connections although it is constructing an inland waterway and developing a 34km three-lane toll road with its partners to connect Tanjung Priok with its hinterland with the aim of easing the traffic congestion near the port. NPCT1's draft of 16m can handle vessels of 12,000 twenty-foot equivalent units (TEUs) and Tanjung Priok is positioned as the transshipment hub for Indonesia.

Stable Rental Income: Revenue Risk (Price) - Stronger

PPI's long-term lease business model features the protective contractual arrangement with NPCT1 as the operator and Pelindo II as the concession owner. PPI benefits from fixed rental income from NPCT1 and fixed rental payments to Pelindo II. Tariffs are reviewed with NPCT1 every five years with a 1% limit on any changes linked to the operator's performance, giving PPI flexibility over rates. This also enables PPI to minimise volatility in its operations, leading to fairly stable cash flows comprising 100% of the contracted payments.

Significant Capital Expenditure Plan: Infrastructure Development and Renewal - Midrange

Fitch forecasts PPI's capex in the next five years will be substantial at IDR2.6 trillion, comprising the investment in the minority-owned Cibitung-Cilincing toll-road project, including a rest area and logistic centre (54%) and a new property business (46%), all of which are green-field projects. PPI has formed a joint venture (JV) with a partner who has the experience and expertise for the major investment. Most of the property will be built on Pelindo II's idle land, which will help PPI avoid land acquisition risks. The toll-road asset was listed as a strategic project in a presidential decree and PPI's planned investment accounts for around 41% of the total capex. Most of its capex plan may be exposed to cost overruns and construction risks, but they are partially mitigated by forming JVs with experienced contractors. Fitch expects most of the capex to be debt-funded, which will result in pressure on PPI's rating.

Upcoming Bullet with Limited Structural Features: Debt Structure - Weak

PPI is currently debt free and hence has limited exposure to financial-market risk. It has a plan to tap IDR500 billion in fixed-rate unsecured bonds in 2020. PPI plans to borrow IDR100 billion through a fixed-rate secured bridge loan in 2019 to cover the timing gap with the 2020 bond issuance. The bridge loan will be secured by a fiduciary of receivables, pledged on an escrow account and have a shareholder covenant for Pelindo II to maintain majority ownership in PPI. It also will be protected by financial covenants on current ratios, leverage and coverage ratios. Both of the plans remain under discussion. PPI has exposure to foreign-currency risk as 100% of its revenue is in US dollar, while the majority of its expenses are in rupiah. However, the planned debt will be in local currency as it is linked to PPI's rupiah capex requirements. Both of the planned debt will expose PPI to refinancing risk, which will be partially mitigated by the parent's relationships in the financial market as the largest state-owned port operator. However, Fitch believes the debt provides limited structural features and covenants, which result in pressure on debt-structure assessment. (ends)