Fitch Ratings – Singapore – 15 January 2019: Fitch Ratings has downgraded Indonesia-based tanker operator PT Soechi Lines Tbk’s (Soechi) Long-Term Issuer Default Rating (IDR) to ‘B’ from ‘B+’. The Outlook on the rating is Stable.

Fitch has also downgraded the rating on the USD200 million 8.375% senior unsecured notes due 2023 issued by wholly owned subsidiary Soechi Capital Pte. Ltd., and guaranteed by Soechi and all its operating subsidiaries, to ‘B’ from ‘B+’. The Recovery Rating for the notes is ‘RR4’.

The rating action follows an increase in Soechi’s leverage in 2018. Soechi’s annualised FFO adjusted net leverage as of 9M18 rose to above 5x from 4.6x in 2017. Fitch said previously it will consider negative rating action if Soechi is unable to reduce leverage to 4x or lower by 2018. We estimate Soechi’s leverage will stay above 4x over the next three years, which indicates a weaker financial profile. Soechi’s leverage increase in 9M18 was due to higher shipping capex despite a flat EBITDA, both of which were worse than our expectations.

Soechi’s management has stated it plans to lower growth-related spending and utilise higher EBITDA from past fleet growth to deleverage. We expect some moderation in leverage from current levels on account of lower spending on ship acquisitions.

However, the company’s long-term intention to expand its fleet in line with domestic demand presents a risk to our forecasts. Soechi’s relatively stable shipping business, underpinned by its robust position and regulatory protection in a steadily growing market, continues to lend support to its rating despite persistent underperformance at its shipyard, which is the underlying reason for its relatively high leverage profile.

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