OREANDA-NEWS. Fitch Ratings has assigned Indonesia-based tanker company PT Soechi Lines Tbk (Soechi) a Long-Term Foreign Currency Issuer Default Rating of 'B+' with a 'Stable' Outlook.

Fitch has also assigned a 'B+(EXP)' expected rating to the USD200m senior unsecured notes to be issued by Soechi Capital B.V., and guaranteed by Soechi and its key subsidiaries. The final rating on the notes is contingent upon the receipt of final documents conforming to the information already received.

KEY RATING DRIVERS
Old Fleet, Small Size: The average age of Soechi's fleet (weighted by capacity) was around 17 years as of 31 March 2015, compared with the typical useful life of 30 years for a ship. Soechi's fleet-age profile corresponds to the company's strategy of operating older ships. Old ships are the norm in the Indonesian market (with the average age of Indonesian-flagged vessels at more than 20 years).

Older ships require higher maintenance expenses and are more prone to operational issues. Ships that are more than 15 years old have to dry-dock every 2.5 years, compared with an interval of five years for newer ships. Soechi's fleet size of 35 revenue earning ships at 31 March 2015 is small relative to global peers. Of the total tonnage capacity at 31 March 2015, 45% was contributed by just two very large crude carriers (VLCCs). As such, Soechi's fleet age and size constrain its rating.

Market Leader in Fragmented Industry: Soechi has about 15% share of Indonesia's domestic tanker market by vessel charter transactions, according to a March 2014 report by Global Business Guide. The market is quite fragmented with small players accounting for about 60% of the market (Soechi and two others contribute the remaining 40%). Cabotage laws, which mandate the use of Indonesia-flagged vessels for domestic transportation, present a high barrier-to-entry for international players.

Robust Industry Growth Prospects: Indonesian shipping companies' tonnage has increased rapidly over the last few years (latest available data from the Ministry of Transportation shows an 18% CAGR over 2008-12). The robust growth was driven by an expanding economy and substitution of foreign operators due to cabotage laws. Indonesian companies now account for almost all of the domestic shipments, compared with 65% in 2007. However, the share of Indonesian companies in the international transportation market is still low (just 10% in 2012). Indonesian shipping companies are likely to see sustained demand growth, underpinned by rising domestic oil and gas demand and supplemented by a potential increase in their share of the import market.

Customer Concentration, But Risk Low: PT Pertamina (Persero) Tbk (BBB-/Stable) is Soechi's largest customer, contributing 52% of its revenue in 2014. As such, Soechi is exposed to risk of Pertamina not renewing contracts or granting new contracts or worse, defaulting on its payments. However, we believe that these risks are significantly alleviated by Soechi's long-standing relationship with Pertamina (Soechi's predecessor companies have been contracted by Pertamina since 1981), its market leadership position with strong operational capabilities, conservative capex policy tied to the demand outlook and Pertamina's healthy credit profile.

Moderate Financial Profile: We estimate Soechi's FFO adjusted net leverage at 3.4x in 2015, and FFO fixed charge cover at 3.3x. Soechi's financial profile could deteriorate if it does not maintain capex discipline over acquisitions tied to the likelihood of new contracts.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Soechi's deadweight tonnage to increase by a CAGR of 17% over 2015-18.
- Tanker day-rates to stay flat.
- Spending (including docking charges, and net of asset disposals) at USD120m in 2015, USD80m in 2016, and about USD60m each in 2017 and 2018.
- Maintenance expenses to rise by 2% a year and salaries by 5% a year, after adjusting for an increase in fleet size.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively lead to negative rating action include
- FFO adjusted net leverage above 4x on a sustained basis;
- FFO fixed charge cover below 3x on a sustained basis;
- Substantial weakening of credit profile due to material capex, and/or a weakening of the operating environment and/or rates.

Positive: The rating has limited upside potential in the medium term, due to constraints related to the age and size of Soechi's fleet.