Fitch Ratings-Jakarta-10 December 2015: Fitch Ratings Indonesia has downgraded Indonesia-based investment holding company PT Saratoga Investama Sedaya Tbk’s (Saratoga) National Long-Term Rating to ‘BBB+(idn)’ from ‘A(idn)’. The Outlook is Stable and rating has been removed from Rating Watch Negative, on which it was placed on 30 October 2015.

The downgrade follows a review of the key rating metrics for Saratoga. Fitch initiated this review because we expected the dividends that Saratoga will receive to be lower than we previously anticipated due to slower domestic economy growth and weak commodity prices. In addition, our forecast for debt at end-2015 is around 45% higher than that at end-2014, and higher than we previously estimated. Finally, foreign-exchange risk has increased with a higher level of US dollar-denominated debt; the weakness of the rupiah in the last year has highlighted this concern.

At the same time, our review took into account the company’s business model of investing for long-term capital gains and its view that selling down stakes in investments to meet interest obligations is a natural part of its business model. Thus, our rating focuses on liquidity – in particular the ratio of dividend plus cash to interest – and the loan to value (LTV) ratio to assess the company’s ability to raise cash by liquidating investments.

‘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

LTV Rises, Still Low: Saratoga’s LTV has increased to about 25% (2014: 13%) due to higher debt and lower market value of its investments. The Jakarta Composite Index, where about 90% of its investments are listed, has lost about 12% of its value in the last 12 months.

Liquidity Key to Rating: The rating reflects that the company does not have clear target levels for the LTV ratio, other than to adhere to the 50% LTV cap in its bank loan covenants. The company’s dividend income is likely to be insufficient to meet interest payments and holding company expenses, so Saratoga will need to raise funds either through new debt or proceeds from the sale of investments. Our rating case assumes no capital appreciation or depreciation in investments and therefore a rising LTV.

Liquidity is currently adequate. Cash at 30 June 2015 was USD82m, more than sufficient to meet USD31m of debt maturing in 2016, unless Saratoga undertakes further investments. The company may sell some of its investments, which could improve liquidity. Fitch expects to downgrade Saratoga’s rating if the ratio of dividends plus cash to interest falls below 2.0x. However, the rating may not be upgraded even if the liquidity ratio were to rise above 2.0x, unless the company is able to demonstrate a strong commitment to maintaining a higher level of liquidity.

Volatile Dividends, Weakening Coverage: In the past three years, the ratio of dividend plus cash to interest has been well above 3x. However, Fitch expects this to fall to about 3.3x in 2015 and below 3x in 2016 onwards. Increasing debt will raise interest costs, while slower economic growth and continued capex requirements may threaten the dividend income from its investments.

Portfolio Composition Developing: The company’s management aims to gradually monetise its more mature investments and invest in early-stage or growth companies. This could offer higher returns, but may be more risky. However, management has a track record of successful investments, including in listed blue chips PT Adaro Energy Tbk (Adaro) and PT Tower Bersama Infrastructure Tbk (TBI, BB/Stable), which together account for 71% of Saratoga’s investment portfolio.

Debt Maturities Extended: In May 2015, Saratoga issued a USD100m five-year exchangeable bond with put option in the third year. Of this, about USD20m was used to refinance debt. Annual debt maturities currently do not exceed USD70m until 2017.

KEY ASSUMPTIONS

Fitch’s key assumptions within the rating case for the issuer include:

– Investment of about IDR800bn per year

– Dividend income of about IDR100bn-130bn per year

– Holding company expenses of about IDR100bn in 2015, which will increase by 5% a year after

– Investments are sold to meet the meet the shortfall between dividend income and holding company expenses and interest.

– Maximum loan-to-value ratio of 30%

– No capital appreciation or deprecation in investments

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

– An increase in the ratio of dividends plus cash to interest to more than 2.5x (and a commitment by the company to maintain the ratio at a higher level), provided that loan-to-value remains at less than 30% and the ratio of loans to listed mature investments remains at less than 40%

– Adequate liquidity to meet debt repayments

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– A decline the ratio of dividends plus cash to interest to less than 2.0x. The rating may not be upgraded even if the ratio improves, unless the company makes a strong commitment to maintain a higher level of liquidity

– Loan-to-value ratio rises to more than 35% and the ratio of loans to listed mature investments rises to more than 45%

– Debt maturity exceeding 10% of portfolio value

– Inability to sell investments that could lead to a liquidity problem

Contact:
Primary Analyst
Rufina Tam
Associate Director
+62 21 2988 6813

Fitch Ratings Indonesia
DBS Bank Tower, 24th Floor, Suite 2403
Jl. Prof. Dr. Satrio Kav 3-5
Jakarta 12940

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