Fitch Ratings has affirmed Indonesia-based port operator PT Pelabuhan Indonesia (Persero)’s (Pelindo) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’. The Outlook is Stable. Fitch has also affirmed Pelindo’s senior unsecured notes at ‘BBB’ with a Stable Outlook.

RATING RATIONALE

The affirmation on IDR reflects Pelindo’s Standalone Credit Profile (SCP) of ‘bbb’, which is underpinned by its dominance in the Indonesian container port industry, strategic location of its flagship ports and long-term concession, which ensures cash-flow generation visibility. Pelindo’s IDR will remain the same in the event the SCP is lowered, reflecting strong linkages with the Indonesian sovereign (BBB/Stable), as assessed under our Government-Related Entities (GRE) Rating Criteria.

Pelindo is the sole state-owned port operator with 110 ports across the archipelago after a 2021 merger. Hence, the government has strong control over the vital logistic supply chain for the country. We also believe that the socio-political implications in the event of Pelindo’s default are strong, as Pelindo dominates Indonesia’s international cargo sea transport and provides inter-island connectivity.

Fitch has revised up Pelindo’s SCP to ‘bbb’ from ‘bbb-‘, reflecting that leverage is lower than our previous expectation and container throughput recovery to pre-Covid-19 pandemic levels has been sooner than the company expected. The previous Fitch base case (FBC) and Fitch rating case (FRC) showed average net leverage in 2021-2025 at 4.8x and 6.5x, respectively. Our current FBC and FRC forecast net leverage to average 2.9x and 3.4x, respectively.

Pelindo’s 2021 EBITDA and free cash flow (FCF) beat our forecast, due mainly to throughput recovery and lower capex. This, combined with the repayment of most of the bank loan at Pelindo I, II, III and IV’s level after the merger of the four entities, reduced net leverage to 3.4x by end-2021. Pelindo could deleverage further if its plan to divest PT Cibitung Tanjung Priok Port Tollways (CTP) were realised. However, we do not include the CTP divestment scenario in our FBC and FRC due to the execution risk.

CTP is a 34km greenfield toll-road asset that carried debt of around IDR6 trillion at end-2021. The toll road is part of the Jakarta Outer Ring Road II connecting Tanjung Priok area to the greater Jakarta network. Pelindo may benefit from the toll road because the asset will provide an alternative cargo evacuation route, thus reducing congestion at Tanjung Priok port. Three out of its four sections have been operational and Pelindo expects that the asset will be fully operational by end-2022.

KEY RATING DRIVERS

GRE Assessment

Strength of Linkages: Fitch views Pelindo’s status, ownership and control by the Indonesian government as ‘Very Strong’. The state fully owns Pelindo and appoints the board of commissioners and directors. It also controls its investment plans and capex decisions. We assess the record of state support to Pelindo as ‘Strong’. There is a limited record of the government providing tangible support because Pelindo has a sound financial profile. However, we expect the company to receive government support, if needed, due to its important role in the country’s economic development and trade activities.

State’s Incentive to Support: Fitch sees Pelindo’s socio-political implications of default as ‘Strong’. We believe that a default would damage the government’s reputation and substitution may be difficult as Pelindo is the largest and sole state-owned company in the sector. Our assessment of the financial implications of a default by Pelindo is ‘Strong’. The company is regarded as one of Indonesia’s important state-owned entities and a default would disrupt investor confidence in the sovereign and other state-owned entities.

Market-Leading Port Operator: Revenue Risk (Volume) – Revised to ‘High Stronger’ from ‘Stronger’

Post-merger, Pelindo is the only Indonesian state-owned port operator that runs the primary ports of call across the nation. It has 110 ports across the archipelago, including four of the country’s flagship ports. Pelindo dominates Indonesia’s container market share and we believe that competition risk is limited in the medium term. Pelindo’s traffic is mainly origin and destination (O&D) with limited transshipment cargo. The concessions for its flagship ports have 30- to 50-year terms, ending in 2045 or later. Land access to Pelindo’s ports is largely via road with limited rail connection.

Fitch has revised its assessment of Revenue Risk (Volume) to ‘High Stronger’ from ‘Stronger’ following the publication of our new Transportation Infrastructure Rating Criteria, which assess volume risk on a five-point scale with six sub-factors. Pelindo achieved a ‘Stronger’ assessment for reference market, strategic importance, diversification and competition and ‘Midrange’ assessment for demand volatility and relative cost to end-users.

Moderate Pricing Flexibility Supported by Fixed Rental Income: Revenue Risk (Price) – Midrange

Pelindo has rental income sourced from its landlord business model with its joint-venture partners. The rental income provided unregulated and stable cash flow of around 9% of total revenue and 27% of EBITDA at end-2021. Tariffs are commercially negotiated with shipping associations but require consultation with the Ministry of Transportation. This bounds Pelindo’s pricing flexibility, evidenced by flat tariffs for its international containers in the past few years. Still, it has been able to increase tariffs on domestic containers. The tariff structure, once fixed, will remain valid for at least two years.

Significant but Manageable Development Plan: Infrastructure Development/Renewal – Midrange

Pelindo continues to add capacity in light of high utilisation rates in flagship ports. It is building two new terminals in Kalibaru to add capacity in Tanjung Priok. Other major projects include the development of Kijing Port, Kuala Tanjung and Makassar New Port to support economic development of Kalimantan, Sumatera and Sulawesi, respectively. Pelindo is also developing the Bali Maritime Tourism Hub in Benoa and has received state capital injections for this project. Its recently acquired toll road has been partially operational – three of the four sections had started commercial operations by end-October 2022.

Management expects to incur total capex of IDR29.6 trillion in 2022-2025, covering both development and maintenance capex. We expect that Pelindo will raise debt to finance its capex, but we believe the infrastructure development and renewal risk is mitigated by the management’s extensive experience in port development.

Dominated by US Dollar Fixed-Rate Bullet Notes: Debt Structure – Midrange

Pelindo’s debt consists of mainly senior unsecured US dollar bonds with a bullet repayment schedule. The next significant debt maturity is in 2023, totalling USD500 million and IDR780 billion. The bullet structure and the maturity amid a high interest-rate environment present significant refinancing risk to the company; however, this risk is mitigated by Pelindo’s established banking relationships and access to both domestic and international debt markets.
Our debt structure assessment is constrained by a lack of covenants and reserve accounts for its debt, given its corporate-like debt structure. In addition, Pelindo does not enter into any hedging transactions and relies on natural hedging from its US dollar revenue from international container handling.

PEER GROUP

Lonsdale Finance Pty Ltd (BBB/Stable) is the issuing entity for the Port of Melbourne, one of the largest container ports in Australia by throughput. Pelindo and Port of Melbourne have similar assessments of volume risk at ‘High Stronger’, reflecting their positions as primary ports, their diverse cargo types and customers and their strong O&D traffic with limited transshipment.

However, Port of Melbourne has a stronger price risk assessment, stemming from its long-term lease agreement that contributes to about a third of the revenue against Pelindo’s fixed rental income at 9% of revenue. This results in more stable cash flow for Port of Melbourne, which also has stronger infrastructure development risk as its future capex requirement is limited. Both companies have similar debt structure assessments, given their corporate-like debt. Nevertheless, Port of Melbourne has a five-year average leverage of 8.4x with a maximum of 8.6x, which counterbalances its more significant long-term lease and limited capex, resulting in a similar rating with Pelindo’s SCP.

DP World Limited (DPW, BBB-/Positive) is the fifth-largest container port operator globally with a gross volume market share of around 9% and weighted-average concession life of about 33 years. DPW benefits from a global network of port concessions focused on key east-west trade routes and a faster growing market. The Positive Outlook reflects Fitch’s expectation that DPW will deleverage to below 4.5x in 2023. In contrast, Pelindo is Indonesia’s largest port operator, dominating the container market, and we expect a lower average net leverage, justifying a one-notch higher SCP than DPW’s rating.

RATING SENSITIVITIES

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

– downgrade of Indonesia’s sovereign rating;

– Pelindo’s SCP may be revised down if the Fitch-adjusted net debt/EBITDA is above 5.0x on a sustained basis under Fitch’s rating case.

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

– upgrade of Indonesia’s sovereign rating provided linkages remain intact;

– Pelindo’s SCP could be revised up if there is sustained improvement in its Fitch-adjusted net debt/EBITDA to below 3.0x under Fitch’s rating case. However, its IDR will be constrained by that of the sovereign.

Source: Fitch Ratings