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Fitch Rates WIKA's IDR5.4 Trillion Komodo Bonds Final 'BB'.

Singapore/Jakarta: Fitch Ratings has assigned a final rating of 'BB' to Indonesia-based construction company PT Wijaya Karya (Persero) Tbk's (WIKA; BB/Stable) IDR5.4 trillion 7.7% senior unsecured notes due 2021. The assignment of the final rating follows a review of the final documentation, which conforms to the draft documentation previously received. The final rating is the same as the expected rating assigned on 14 January 2018.

The notes, known as komodo bonds, are denominated in rupiah, but both the coupon payments and principal on maturity are settled in US dollars at the prevailing rupiah-dollar exchange rate. As such, the investors bear the foreign-exchange risk due to a weaker rupiah. The settlements are still subject to transfer and convertibility risk on foreign exchange involving the rupiah and the rating on the notes can be no higher than Indonesia's Country Ceiling of 'BBB'.

The linkage of payments under the terms of the notes to the prevailing exchange rate means that Fitch does not regard the conversion of currencies at the transaction's initiation and maturity as altering the underlying local-currency nature of the note.

The unsecured notes will be a direct, unsecured and unsubordinated obligation to the company, ranked pari passu with all other unsecured and unsubordinated debt of the company, and will be effectively subordinated to secured obligations of the company and its subsidiaries. Part of the proceeds of the notes will be used to repay secured debt, which, in our estimate, would cut the ratio of prior ranking debt to total debt to below 2.0x. Fitch considers a threshold of 2.0x-2.5x as the level above which senior unsecured creditors' interests are materially subordinated to the interests of secured or prior ranking creditors. We therefore rate the notes at the same level as WIKA's Long-Term Local-Currency Issuer Default Rating (IDR) of 'BB'.

KEY RATING DRIVERS

Robust Order-Book Growth: By end-October 2017, WIKA achieved 80% of its IDR43 trillion full-year 2017 target for new contracts. The company expanded its order-book in 2016 to IDR83 trillion, surpassing our expectations. We expect new contract wins over the medium term to ease gradually as the company focuses more on executing its existing order-book to improve its revenue recognition and cash flows. Nevertheless, construction order-book/revenue should remain high at between 3.5x-4.0x in 2018-2020.

Large Flagship Projects: The strong order-book growth has been supported by large strategically important flagship projects as part of the government's infrastructure development program, such as the IDR15.7 trillion Jakarta-Bandung High Speed Railway (HSR), which contributed new orders of IDR54 trillion during 2016. However, execution of the contracts has been slower than we expected, resulting in weaker cash generation and revenue recognition.

Its projects were held up by delays in land acquisition. However, the government recently announced new regulations (Peraturan Pemerintah (PP) No 13/2017) to help expedite the land-clearing process for national strategic projects, and this may help to mitigate further delays in

the execution of the HSR project. WIKA also had to prioritise the delivery of the Balikpapan-Samarinda toll road, the Kelapa Gading LRT project and a few others over the HSR, as these other projects need to be completed ahead of the Asian Games, which will be held in Jakarta in 2018.

Small Scale, Cash Flow Deficit: WIKA's standalone credit profile of 'B+'/'A+(idn)' reflects its small operating scale relative to global and national peers, as well as its negative free cash flow (FCF) due to a requirement to fund the government's infrastructure programme. We see WIKA remaining in a high-growth phase over the next few years as it executes its strong order-book. Therefore, we expect WIKA to post negative FCF (after planned investments in joint operations and associates) over the medium term, due to the high working capital needed to fund the government's infrastructure projects and WIKA's investment commitments.

Several strategic national projects, including the IDR5.9 trillion Balikpapan-Samarinda toll-road project, require the company to pre-finance them. We also expect WIKA to invest the remaining IDR4 trillion from its 2016 rights issue into several projects in 2018, such as the Serang-Panimbang Toll Road. The negative FCF is supported by WIKA's strong access to domestic credit markets because of its association with government and government-sponsored construction projects and as well as its track record.

Strategic Importance to Government: WIKA's ratings benefit from a two-notch uplift over its standalone profile, based on Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch assesses that WIKA has strong operational and strategic linkages, but a weak legal link, with its parent, the government of Indonesia, which owns a 65.05% stake. We do not expect any change to WIKA's rating uplift after the finalisation of our rating criteria on government-related entities following the publication of an exposure draft in November 2017. Upon finalisation, a strengthening of WIKA's standalone credit profile may not lead to a positive rating action.

DERIVATION SUMMARY

WIKA's standalone IDR of 'B+' compares well with international peers such as Italy's Astaldi S.p.A (B/Negative) and Spain's Grupo Aldesa (B/Stable). WIKA's standalone National Long-Term Rating of 'A+(idn)' compares well with PT Sri Rejeki Isman Tbk (Sritex, A+(idn)/Stable) and PT Waskita Karya (Persero) Tbk (WSKT, standalone rating of BBB+(idn)/Stable).

Aldesa's operations are more geographically diverse than WIKA's. However, WIKA has a larger operating scale, as reflected in its leading market position in Indonesia, and a substantially stronger financial profile than Aldesa, leading to WIKA's higher standalone IDR of 'B+' compared with Aldesa's 'B' IDR. Aldesa faces multiple challenges in its end-markets and limited growth prospects, while growth prospects for WIKA are brighter.

Astaldi's operating scale is larger than that of WIKA, although its project-concentration risk is significantly higher. Its larger scale is reflected in Astaldi's broader geographical diversity than WIKA. However, Astaldi's heavy investments in toll-road concessions have led to substantially higher leverage and cash outflow due to working-capital increases compared with WIKA. Therefore, Astaldi is rated one notch lower compared with WIKA's 'B+' standalone IDR.

WIKA's cash flows would be more cyclical than those of Sritex's as they are leveraged to the pace at which the government executes its infrastructure programme. The company's order-book and cash flows have expanded strongly in the last eight years due to Indonesia's infrastructure investments. WIKA has a considerably stronger financial profile than Sritex to compensate for its more cyclical cash flows and is therefore rated at the same National rating level as Sritex on a standalone basis.

WSKT is the largest Indonesian construction company and its recent business growth has been due largely to a rapid increase in toll-road investments and related order-book in 2016. Both are equally strategically important to the state, albeit in different infrastructure segments. However, WSKT's financial profile is significantly weaker than that of WIKA, which drives its three-notch lower standalone rating.

KEY ASSUMPTIONS

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

- WIKA's order-book to increase to more than IDR100 trillion in 2017, and around IDR120 trillion in 2018

- EBITDA margins to hover between 10% and 11% in 2017-2020

- Aggregate capex and investments of around IDR9 trillion in 2017 and IDR2.5 trillion in 2018

- Dividend payout ratio of 30% in 2017-2020

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

-Stronger linkages between WIKA and the government of Indonesia

-A strengthening in WIKA's standalone profile, as reflected in a substantial increase in its operating scale combined with the ability to generate neutral FCF after investments in projects, on average, while maintaining a stable credit profile.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action

-Weakening credit profile of the Republic of Indonesia and/or weakening linkages between WIKA and the government

-Weakening in WIKA's standalone credit profile, as reflected by an increase in its net adjusted debt/EBITDAR to more than 2.0x, or EBITDAR fixed-charge cover to less than 2.5x, both on a sustained basis

LIQUIDITY

Adequate Liquidity: WIKA had readily available cash of IDR7.2 trillion at 30 September 2017, which was supported by its IDR6.1 trillion rights issue in end-2016. With the addition of the bond issuance, we believe WIKA has adequate liquidity to cover its maturing term loans and our projected negative FCF after investments in 2018. WIKA also has strong access to domestic credit markets, particularly to state-owned banks, given its association with the state and its strong operating record, which further underpin its liquidity profile.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:9INDO
Date:Apr 10, 2018
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