Fitch Places Pelindo on Rating Watch Negative on Merger with Other Ports

(Fitch Ratings - Jakarta - 06 Oct 2021)--Fitch Ratings has placed PT Pelabuhan Indonesia (Persero)'s (Pelindo) 'BBB' Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and senior unsecured notes on Rating Watch Negative (RWN).

RATING RATIONALE

Pelindo was previously PT Pelabuhan Indonesia II (Persero) (Pelindo II), which was the surviving entity after it merged with PT Pelabuhan Indonesia III (Persero) and two other state-owned port operators, PT Pelabuhan Indonesia I (Persero) and PT Pelabuhan Indonesia IV (Persero). The merged entity has been renamed PT Pelabuhan Indonesia (Persero) (Pelindo).

The RWN reflects the potential for a downgrade of the ratings on Pelindo after Fitch's review of Pelindo's consolidated business and financial profiles, and linkages with the Indonesian government (BBB/Stable).

The assets and liabilities of the other three operator have been transferred to Pelindo. All four port operators are fully owned by the government, and the merger does not change their ownership, so there is no change of control event.

KEY RATING DRIVERS

Underlying Credit Profile Under Review: Pelindo will benefit from a larger scale and stronger competitive position following the merger, compared with Pelindo II. Pelindo II's ratings reflected its Standalone Credit Profile of 'bbb', which was at the same level as the sovereign rating. Fitch is reassessing the merged entity's consolidated financial profile. Any deterioration in the merged entity's SCP relative to Pelindo II will likely result in a change in the rating approach to top-down minus 1 notch, if linkages with the government remain intact, in line with Fitch's Government-Related Entities Rating Criteria.

Merger May Strengthen Competitive Position: We believe the merger creates a dominant container port operator in Indonesia that faces limited competition. Pelindo will operate 96 ports across the country and manage four flagship ports, including Belawan Port in western Indonesia, Tanjung Priok and Tanjung Perak in the central region and Makassar Port in the east. The company will be the main gateway through which most of the country's trade will flow.

Government Linkages May Strengthen: The merged entity's linkages with the government may strengthen as Pelindo will be strategically more important to the government than each of the four component companies, in our view. The government will be able to improve connectivity, enhance efficiency and reduce logistics cost across Indonesia through a single entity. If we assess that Pelindo's linkages with the government have strengthened meaningfully, the rating will be equalised to that of the sovereign even if Pelindo's SCP is three notches away from the sovereign rating.

RATING SENSITIVITIES

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

- Fitch may downgrade Pelindo's ratings if we assess that its consolidated business and financial profiles has deteriorated relative to those of Pelindo II and/or we assess that its linkages with the government have weakened after the merger.

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

- Fitch may remove Pelindo's ratings from Rating Watch Negative and affirm Pelindo's Long-Term IDR, senior unsecured rating and senior unsecured rotes ratings at their current levels if Fitch believes that Pelindo's consolidated business and financial profiles and/or assessment of linkages with the government post-merger remain unchanged.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three 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.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

Pelindo's ratings are credit linked to that of the Indonesian sovereign.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)