29.01.2016, 08:18
Fitch Revises Garuda Outlook to Stable, Affirms at 'BBB+(idn)'
OREANDA-NEWS. Fitch Ratings has affirmed PT Garuda Indonesia Tbk's (Garuda) National Long-Term Rating at 'BBB+(idn)' and revised the Outlook to Stable from Negative. At the same time, Garuda's senior unsecured debt class rating and rating on its outstanding IDR2trn bond due in 2018 have also been affirmed at 'BBB+(idn)'.
'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher-rated category.
KEY RATING DRIVERS
Improved Profitability: The Outlook revision to Stable reflects the improvement in Garuda's operating metrics, which was driven by lower fuel prices and cost-efficiency measures the company implemented in the 12 months to September 2015. Fitch expects the improved profitability to allow Garuda to reduce its leverage, as measured by adjusted debt to funds from operations (FFO), to about 5.8x as at 31 December 2015, from more than 9.0x at end-2014. Fitch expects leverage to remain below 6.0x over the next one to two years.
The above leverage metrics are based on the revised capitalised lease multiple of 6x from the previous 8x, in line with Fitch's "Treatment of Operating Leases in Corporate Analysis", dated 18 September 2015. Accordingly, the rating sensitivities have been adjusted to reflect the change in the multiple.
Operating Environment Remains Challenging: Primary rating concerns include industry risks that are typical for any airline, including cyclicality, high levels of operating leverage, exposure to exogenous events, and fluctuating fuel prices. The industry remains highly sensitive to the overall macroeconomic environment. Furthermore, Garuda is exposed to a fundamental currency mismatch in its business model (over 50% of revenue is in Indonesian rupiah but about 70% of its costs are denominated in foreign currencies) and a depreciating rupiah, which may reduce yields. Given this, we do not rule out a faster-than-expected deterioration in the company's operations, especially if fuel prices rise significantly in a short period of time. We see limited rating headroom for the company in the short to medium term.
No Immediate Liquidity Pressure: Garuda's standalone rating is supported by the company's satisfactory financial flexibility. Liquidity is supported by USD409m in cash against USD394m of short-term debts (including lease financing) and availability of working-capital lines which may provide additional liquidity support.
State Support: Garuda's rating incorporates two notches of support from the government of Indonesia (BBB-/Stable). The uplift is primarily driven by the government's majority ownership of Garuda, which is the nation's largest carrier, and implied benefits associated with linkage to the government, including on-board immigration services. The fact that there has been direct financial support in the past is another strong evidence of support and strategic linkage to the government.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- Load factor of 77% for 2016 and 78% for 2017-2018
- Passenger yield of USD7.25 cents for 2016-2018
- Total passengers of 36.95m in 2016, 41.62m in 2017 and 49.34m in 2018
- Jet fuel price of USD80.50 per barrel in 2016, USD90.50 in 2017 and USD95.50 in 2018
- Issuance of USD500m bond in 1Q16
RATING SENSITIVITIES
Negative: Developments that may, individually or collectively lead to negative rating action include:
- FFO-adjusted leverage at more than 6x (2016F: 5.8x) on a sustained basis
- FFO fixed-charge cover of less than 1.2x (2016F: 1.2x) on a sustained basis
- Liquidity ratio (cash/ revenue) of less than 8% (2016F: 17.1%) on a sustained basis
Positive: Developments that may, individually or collectively lead to positive rating action include:
- FFO-adjusted leverage at less than 5x on a sustained basis
- Liquidity ratio (cash/ revenue) of more than 12% on a sustained basis
FULL LIST OF RATING ACTIONS
PT Garuda Indonesia Tbk
National Long-Term Rating affirmed at 'BBB+(idn)'; Outlook revised to Stable
Senior unsecured rating affirmed at 'BBB+(idn)'
IDR2trn outstanding 9.25% senior unsecured bond due 2018 affirmed at 'BBB+(idn)'
'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher-rated category.
KEY RATING DRIVERS
Improved Profitability: The Outlook revision to Stable reflects the improvement in Garuda's operating metrics, which was driven by lower fuel prices and cost-efficiency measures the company implemented in the 12 months to September 2015. Fitch expects the improved profitability to allow Garuda to reduce its leverage, as measured by adjusted debt to funds from operations (FFO), to about 5.8x as at 31 December 2015, from more than 9.0x at end-2014. Fitch expects leverage to remain below 6.0x over the next one to two years.
The above leverage metrics are based on the revised capitalised lease multiple of 6x from the previous 8x, in line with Fitch's "Treatment of Operating Leases in Corporate Analysis", dated 18 September 2015. Accordingly, the rating sensitivities have been adjusted to reflect the change in the multiple.
Operating Environment Remains Challenging: Primary rating concerns include industry risks that are typical for any airline, including cyclicality, high levels of operating leverage, exposure to exogenous events, and fluctuating fuel prices. The industry remains highly sensitive to the overall macroeconomic environment. Furthermore, Garuda is exposed to a fundamental currency mismatch in its business model (over 50% of revenue is in Indonesian rupiah but about 70% of its costs are denominated in foreign currencies) and a depreciating rupiah, which may reduce yields. Given this, we do not rule out a faster-than-expected deterioration in the company's operations, especially if fuel prices rise significantly in a short period of time. We see limited rating headroom for the company in the short to medium term.
No Immediate Liquidity Pressure: Garuda's standalone rating is supported by the company's satisfactory financial flexibility. Liquidity is supported by USD409m in cash against USD394m of short-term debts (including lease financing) and availability of working-capital lines which may provide additional liquidity support.
State Support: Garuda's rating incorporates two notches of support from the government of Indonesia (BBB-/Stable). The uplift is primarily driven by the government's majority ownership of Garuda, which is the nation's largest carrier, and implied benefits associated with linkage to the government, including on-board immigration services. The fact that there has been direct financial support in the past is another strong evidence of support and strategic linkage to the government.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- Load factor of 77% for 2016 and 78% for 2017-2018
- Passenger yield of USD7.25 cents for 2016-2018
- Total passengers of 36.95m in 2016, 41.62m in 2017 and 49.34m in 2018
- Jet fuel price of USD80.50 per barrel in 2016, USD90.50 in 2017 and USD95.50 in 2018
- Issuance of USD500m bond in 1Q16
RATING SENSITIVITIES
Negative: Developments that may, individually or collectively lead to negative rating action include:
- FFO-adjusted leverage at more than 6x (2016F: 5.8x) on a sustained basis
- FFO fixed-charge cover of less than 1.2x (2016F: 1.2x) on a sustained basis
- Liquidity ratio (cash/ revenue) of less than 8% (2016F: 17.1%) on a sustained basis
Positive: Developments that may, individually or collectively lead to positive rating action include:
- FFO-adjusted leverage at less than 5x on a sustained basis
- Liquidity ratio (cash/ revenue) of more than 12% on a sustained basis
FULL LIST OF RATING ACTIONS
PT Garuda Indonesia Tbk
National Long-Term Rating affirmed at 'BBB+(idn)'; Outlook revised to Stable
Senior unsecured rating affirmed at 'BBB+(idn)'
IDR2trn outstanding 9.25% senior unsecured bond due 2018 affirmed at 'BBB+(idn)'
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