OREANDA-NEWS. Fitch Ratings Indonesia has assigned PT Pelabuhan Indonesia I (Persero)'s (Pelindo I) proposed IDR1trn bonds a National rating of 'AA(idn)'.

The proposed bonds are rated at the same level as Pelindo I's National senior unsecured rating of 'AA(idn)' as the bonds constitute senior unsecured obligations of the company. Pelindo I will use the proceeds of the bond issue to fund capital expenditure.

KEY RATING DRIVERS

Solid Business Operations: Fitch expects Pelindo I's business operation to remain solid as it is the only major public port operator in Northern Sumatra. Pelindo I is the gateway to western Indonesia. Nearly all of the cargo volumes that Pelindo I handles are generated by production and consumption in its hinterland, which is more stable than transhipment cargoes.

Good Growth Prospects: Pelindo I's business growth is linked to the growth prospects of North Sumatra, which accounts for around 75% of the port operator's revenue. In 2015, North Sumatra's economy recorded higher growth of 5.1% compared with 3.5% for Sumatra and 4.7% for Indonesia as a whole. Pelindo I will benefit from a recovery in GDP growth for Indonesia; Fitch expects the Indonesian economy to expand 5.3% in 2016 and 5.5% in 2017.

Low Share of Indonesia's Volumes: Pelindo I's share of port volumes in Indonesia was a small 9.4% in 2014, even though its Belawan main port is the third-largest in Indonesia. In comparison, Indonesia's two largest ports, Tanjung Priok and Tanjung Perak, control about 41% and 22% of national volumes, respectively. Both of these ports are located in Java, which is the country's main centre of trade and its most populated island.

Less-Resilient Volumes: The majority of Pelindo I's cargo volumes are commodities, and mining and agriculture products, which may be less resilient during an economic slowdown than the cargoes handled by the ports in Java.

Expansion and Execution Risks: Pelindo I expects to spend IDR10trn on five major projects over the next four years to improve its port operations and on the development of an industrial estate in North Sumatra. These projects will boost port capacity and allow the port to serve larger vessels. These investments, however, remain exposed to execution risks - including time delays, cost overruns and slower-than-expected operational ramp-up.

Robust Standalone Financial Profile: Fitch expects leverage (as measured by FFO-adjusted net leverage on a consolidated basis) to remain weaker than is comfortable for its 'AA(idn)' rating through 2017, before improving thereafter. This takes into account the forecast increase in debt-funded capex for the expansion projects and the lag before the projects generate revenue. Pelindo I has guaranteed its subsidiaries' secured debt obligations to support the new projects. We do not expect Pelindo I to receive dividends from the projects in the medium term. However, the ratings take into consideration the robust financial profile of Pelindo I on an unconsolidated basis.

The assets and operations at the rated entity, including the existing Belawan Port with 1.2 million twenty-foot equivalent unit (TEUs) handling capacity, provide stable cash generation. Debt at the Pelindo I level (IDR548bn at December 2015) will increase as the company raises funding to finance equity infusions into its subsidiaries. However, we expect the total indebtedness at the Pelindo I level to remain relatively moderate, and debt-servicing at Pelindo I to be managed comfortably with its own cash generation.

One-Notch Uplift from Linkage: Pelindo I's National Long-Term Rating of 'AA(idn)' incorporates a one-notch uplift from its standalone rating due to the moderate operational and strategic linkage with the Indonesian state. The government approves the company's budget and controls the appointment of key management officials. The company also plays an important role in government's plan to improve the efficiency of the country's maritime industry.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Major tariff increase every two years, in line with increases in 2012 and 2014
- Consolidated capex in line with management's forecast of IDR3.7trn in 2016, IDR9.2trn in 2017, and IDR2.1trn in 2018
- Standalone (unconsolidated) capex in line with the management's forecast of IDR2.5trn in 2016, IDR3.9trn in 2017, and IDR1.6trn in 2018
- Contribution from its industrial land sales project to start in 2018
- Dividend payout ratio of 20%, reflecting the historical trend of decreasing payouts during expansion

RATING SENSITIVITIES

The rating on Pelindo I's bonds is sensitive to changes to the company's senior unsecured rating, which will move in line with changes in Pelindo I's National Long-Term Rating.

Positive: Developments that may, individually or collectively, lead to positive rating action on the National Long-Term Rating include:
- No positive rating action on Pelindo I's standalone rating is anticipated in the medium term because of the company's substantial investment requirements and the risks associated with these
- Strengthening of linkages with the state

Negative: Developments that may, individually or collectively, lead to negative rating action on the National Long-Term Rating include:
- Pelindo I's unconsolidated FFO-adjusted net leverage sustained above 3.25x (FY15: 0.8x)
- A sustained weakening of Pelindo 1's consolidated FFO-adjusted net leverage above 4.5x (FY15: 0.8x) and FFO fixed-charge coverage below 2.5x (FY15: 4.4x)
- Significant cost overruns from new projects, weaker-than-expected performance, or substantial increase in capital expenditure.
- Weakening of linkages with the state

In addition, the senior unsecured rating may be lowered if the secured debt at Pelindo I (entity level) were to rise significantly.