OREANDA-NEWS. March 16, 2015. Fitch Ratings Indonesia has affirmed PT Pupuk Indonesia (Persero)'s (PTPI) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable. At the same time, the agency has also affirmed PTPI's National senior unsecured rating and IDR1,471bn of senior unsecured bonds at 'AAA(idn)'.

'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. 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

Rating Equalised with Sovereign: Fitch equalises the rating on PTPI with that on its ultimate shareholder, the government of Indonesia. The agency believes that there are strong operational, legal, and strategic linkages between the two in accordance with the agency's parent and subsidiary linkage methodology. As the sole shareholder, the government sets the operational and strategic direction of PTPI through annual budget approval and the appointment of its board of commissioners and executive management.

Supporting National Food Security: PTPI's primary role goes beyond its public service obligation to produce and distribute subsidised fertiliser. In carrying out its obligation, PTPI has an important role in supporting the nation's food security, particularly in rice, the nation's staple food. Fitch believes that food security will remain one of the priorities of the new government.

Although Indonesia can import rice, there is reluctance to do so because of the wider political and social implications. By supplying farmers, the government indirectly ensures the well-being of more than 20 million households who engage in farming. Without subsidised fertiliser, small farmers would struggle to make a profit as fertiliser is a significant cost.

Subsidy Reimbursement: PTPI makes and distributes subsidised fertilisers to farmers with a farm area of less than 2 hectares. In 2014, PTPI supplied more than 8.8 million tonnes of fertiliser as part of its obligation. This activity of selling fertiliser at regulated selling prices accounted for IDR12.9trn of revenue, or about 20% of its total revenues.

PTPI receives a subsidy for carrying out its public service obligation from the government. The subsidy is the excess of production and distribution costs plus a pre-determined margin over the regulated fertiliser selling price. The company received IDR22.5trn in subsidies from the government in 2014. This mechanism helps to protect PTPI's margins from the volatility in the price of gas and other raw materials.

In 2015, PTPI expects to receive a significantly higher subsidy of IDR35trn from the government. We believe this highlights the government's stronger commitment towards national food security. The higher subsidy will help improve the company's liquidity by significantly reducing subsidy receivables and short-term external borrowing. Additionally, this will help PTPI in executing its revitalisation programme and ultimately improve sustainability of subsidised fertiliser supply.

Priority of Gas Allocation: PTPI receives priority in gas allocation from the Ministry of Energy and Natural Resource. The fertiliser manufacturing industry is ranked behind the oil and gas industry and ahead of electricity generators in priority. Fitch views this support as important because gas accounts for 60% of PTPI's production costs and there is a tight supply of gas in the country.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- The government will continue its subsidy reimbursement
- Capex progresses as management assumes
- Dividend payment above IDR1trn a year

RATING SENSITIVITIES

No positive rating action is possible as the company's rating is already at the highest level on the national scale.

Negative: Future developments that could individually or collectively lead to negative rating actions include:
- Evidence of weakening links with the Indonesian sovereign might trigger a negative rating action.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 13 November 2014:

The main factors that could, individually or collectively, lead to positive rating action, are:
- A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign investor sentiment, for instance through lower commodity export dependence or higher FDI inflows.
- Implementation of structural reforms or improvements in infrastructure that would allow for higher sustainable GDP growth.

The main factors that could, individually or collectively, lead to negative rating action, are:
- A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties, for example, as a result of an undue change in the authorities' current cautious monetary policy strategy.
- A rise in the public debt burden caused by discontinuation of adherence to the fiscal policy rule.