Moody's revises Jasa Marga's outlook to negative, affirms Baa2 ratings

(Singapore, April 08, 2020) -- Moody's Investors Service has today changed the outlook on the ratings of Jasa Marga (Persero) Tbk (PT) to negative from stable. At the same time, Moody's has affirmed the Baa2 issuer and senior unsecured ratings.

RATINGS RATIONALE

The change in outlook to negative reflects Jasa Marga's exposure to the rising credit risks associated with the negative impact of the coronavirus outbreak on revenue. Moody's expects a contraction in traffic volumes on Jasa Marga's toll roads will weaken its cash flow generation in 2020. The extent to which traffic will contract remains uncertain, since unlike other countries, the Indonesian government has not yet mandated a lockdown to contain the coronavirus. Without a mandated lockdown, Moody's estimates April traffic will decline 35%-45% from April 2019 levels.

Jasa Marga's Baa2 ratings reflect (1) its Baseline Credit Assessment (BCA) of ba2; and (2) a three-notch uplift based on Moody's expectation that the company will receive a high level of support from the Government of Indonesia (Baa2 stable) in the event that extraordinary financial support is required. Moody's believes Jasa Marga plays a critical role in Indonesia's plan to develop transport infrastructure, particularly the toll roads sector.

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. The toll roads sector has been one of the sectors affected by the shock given its direct exposure to government containment and regulatory measures and also its sensitivity to consumer demand and sentiment.

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 potential impact on Jasa Marga of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The negative outlook also reflects the increasing risk that Jasa Marga's financial profile will become weakly positioned for its current rating. More specifically, Moody's would expect Jasa Marga to maintain funds from operations (FFO)/debt above 3.5% and interest coverage above 1.4x, both on a sustained basis, to support the ba2 BCA.

The weaknesses in Jasa Marga's financial profile, including limited buffers in its financial metrics and reliance on external financing during these uncertain times, have left it vulnerable to shifts in demand in these unprecedented operating conditions. Jasa Marga's credit profile is reliant on prospective traffic growth for its toll roads in development or ramping up to strengthen its financial profile to pre-coronavirus levels. Although Jasa Marga is seeking to reduce operating and capital expenditures in response to the coronavirus, there may be limited opportunity for Jasa Marga to materially reduce capital expenditure in 2020.

Recent regulatory and corporate actions amid the ongoing uncertainties associated with the coronavirus outbreak are also credit negative for Jasa Marga. Tariff adjustments for a number of Jasa Marga's toll roads have been postponed. While Jasa Marga is eligible for compensation for this delay, uncertainty remains around the form, amount and timing of the compensation. And on 12 March, Jasa Marga announced a share buyback plan of up to IDR500 billion over the next three months[1]. The planned share buyback will impact liquidity at a time when traffic impact arising from the coronavirus is negative and amid the company's plan to undertake significant expansionary capital spending in the next two to three years.

Notwithstanding the more challenging operating environment in 2020, demand for Jasa Marga's toll roads has historically been resilient, given continued economic growth and the favourable demographics of a growing middle class.

More generally, Jasa Marga's credit quality continues to reflect (1) robust demand dynamics; (2) Indonesia's resilient and high-density traffic profile; and (3) Moody's assumption of a high level of government support, reflecting the national importance of the toll road sector in Indonesia and Jasa Marga's leading position.

LIQUIDITY

Jasa Marga's liquidity in the coming 12 to 18 months is weak due to the negative cash flow impact of the coronavirus, committed capital expenditure payments, the cash requirements for the share buyback and dividend payments. Jasa Marga also has IDR4 trillion of Komodo bonds coming due on 11 December 2020.

Moody's understands that, as of the end of March 2020, Jasa Marga had approximately IDR3.5 trillion of cash on its balance sheet. Liquidity is supplemented by IDR21.5 trillion undrawn committed credit facilities, of which IDR8.2 trillion expires over the next 12 months. Jasa Marga is in talks with local banks to extend expiring facilities as well as to obtain more committed liquidity facilities. In addition, Jasa Marga is assessing initiatives aimed at reducing, where possible, its cost base and optimising its investment spend, with the objective of further supporting its liquidity profile during this challenging period.

Given the reduction in earnings stemming from the more challenging operating environment, Moody's expects that Jasa Marga may need to provide support to some of the subsidiaries or investments with project-level debt to avoid covenant breaches for those debt. The liquidity requirements are uncertain and depend on the extent of traffic declines and project-level financial reserves available. Currently, one of Jasa Marga's subsidiaries has a pre-existing covenant breach which is technical in nature and related to the financial covenants. The breach had been waived by banks for 2019 and Moody's is awaiting documentation regarding the waiver for 2020 and the amendment to the financial covenants, which will prevent a breach going forward.

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

An upgrade is unlikely, given the negative outlook and the fact that Jasa Marga's rating is already at the same level as Indonesia's Baa2 rating.

However, the outlook could return to stable if within the next 12 to 18 months, the company's financial profile and key credit metrics sustainably return to levels commensurate with the current rating, while it maintains a good liquidity profile. This can be the result of a combination of the following factors: (1) a contraction in traffic that is more benign than Moody's current assumptions; (2) sufficient and timely compensation or support from the government to address the weaker credit metrics resulting from the tariff freeze and decline in traffic; (3) Jasa Marga's execution of operating and capital expenditure savings of sufficient magnitude; and/or (4) Jasa Marga demonstrating continued access to funding to bolster its liquidity profile.

Jasa Marga's BCA, and hence its ratings, could be downgraded if FFO/debt falls below 3.5% and interest coverage below 1.3x-1.4x, both on a sustained basis.

Jasa Marga's final ratings could also be downgraded if Indonesia's sovereign rating is downgraded or if there is an indication of a decline in the company's strategic importance to the Indonesian toll road sector or the government, therefore reducing the level of government support available to Jasa Marga. (ends)