Moody's affirms Pelindo's Baa3 ratings, changes outlook to positive

(Singapore, October 06, 2021) -- Moody's Investors Service has affirmed Pelabuhan Indonesia II (Persero) (P.T.)'s -- now known as PT Pelabuhan Indonesia (Persero) (Pelindo) -- Baa3 issuer and senior unsecured bond ratings, including senior unsecured bond ratings transferred from Pelabuhan Indonesia III (Persero) (P.T.). Moody's has also affirmed its Baseline Credit Assessment (BCA) of ba1.

At the same time, Moody's has changed the outlook to positive from stable.

Finally, Moody's has also withdrawn Pelabuhan Indonesia III (Persero) (P.T.)'s Baa3 issuer rating, ba1 BCA and stable outlook because the entity has merged into Pelindo and does not exist as a standalone entity post-merger.

"The outlook change reflects Pelindo's strengthened business profile and increasing strategic importance following its merger, with a larger scale of business and stronger competitive market position as a dominant port operator in Indonesia," says Yong Kang, a Moody's Analyst.

On the basis of Government Regulation Number 101 of 2021, Pelabuhan Indonesia II (Persero) (P.T.), as a surviving entity, announced the completion of its merger with Pelabuhan Indonesia I (Persero) (P.T.), Pelabuhan Indonesia III (Persero) (P.T.) and Pelabuhan Indonesia IV (Persero) (P.T.) on 1 October 2021.

RATINGS RATIONALE

Pelindo's Baa3 ratings reflect (1) its ba1 BCA, and (2) a one-notch uplift from Moody's assessment of a strong likelihood that Pelindo will receive extraordinary support from the Government of Indonesia (Baa2 stable) in times of need. The assessment of uplift considers factors including the government's 100% ownership in Pelindo and the port operator's pivotal strategic role in Indonesia's maritime transportation sector.

"The affirmation of Pelindo's Baa3 ratings reflects our view that Pelindo will continue to play a key role in Indonesia's economy, which explains the uplift," adds Kang.

For now, Moody's has maintained its assessment of strong support for Pelindo under the rating agency's Joint Default Analysis for government-related issuers (GRIs). However, Pelindo's strategic importance has increased post-merger.

Pelindo's dependence with the Government of Indonesia remains high, reflecting its common revenue base and close relationship with the government through its domestic policies.

Pelindo's standalone credit profile is supported by (1) the company's stronger market position following the merger; (2) favorable long-term industry fundamentals; and (3) its strong financial metrics for its current ba1 BCA level, which are also a primary driver of the positive outlook.

In addition, operational integration and optimal capital allocation following the merger will help Pelindo create values over the next few years.

These credit strengths are counterbalanced by Pelindo's sizeable capital spending plans, which entail execution risk, and implementation risk stemming from the business integration over the next 2-3 years. The company's budgeted annual capital spending is IDR12 trillion-IDR15 trillion in 2021-22.

Moody's expects Pelindo's funds from operation (FFO)/adjusted debt to be 9%-11% over the next 12-18 months, assuming that trade volumes will gradually recover following a decline in 2020.

Pelindo's liquidity is strong. The company's cash holdings of IDR15.3 trillion as of August 2021 and its operating cash flow will be able to cover its planned capital expenditure, dividend payments and maturing debt over the next 12 months. In addition, stronger funding market access following the merger will also support the liquidity.

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

The positive outlook reflects a stronger standalone credit quality, which can be sustained if there's a clarity of financial policy and capital spending plan post successful integration. The positive outlook also reflects a higher strategic importance for the merged entity, given the size and scale relative to the Indonesian port sector.

Over the next 12-18 months, Moody's could upgrade Pelindo's ratings if there is (1) an indication of a material increase in likelihood of government support, or (2) an upgrade of the company's BCA. Additionally Moody's could upgrade Pelindo's ratings if Indonesia's sovereign rating is upgraded.

Moody's could raise Pelindo's BCA if (1) the company's FFO/debt exceeds 10% on a sustained basis, and (2) its business mix and financial policies are supportive of a stronger credit profile.

Moody's could return the ratings outlook to stable if Pelindo's standalone credit quality weakens such that its FFO/debt remains below 10% as a result of (1) weaker earnings because of slower-than-expected recovery from the pandemic or higher-than-expected costs of business integration, or (2) its debt level rises because of more aggressive capital spending or increased shareholder return. In addition, Moody's could change the outlook to stable if Indonesia's sovereign rating is downgraded.

Although unlikely, given the positive outlook, Moody's could downgrade Pelindo's ratings if the likelihood of government support for the company decreases.

The methodologies used in these ratings were Privately Managed Ports Methodology published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1129671, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Pelindo is Indonesia's dominant port operator with 69 ports across the country, including the country's largest and busiest container port, Tanjung Priok in Jakarta, and other main hub ports of Indonesia such as Belawan, Tanjung Perak and Makassar. The company is wholly-owned by the Ministry of State Owned Enterprises and regulated by the Ministry of Transportation. (ends)