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RPT-Fitch Downgrades Garuda to 'A-(idn)'; Outlook Stable
April 8, 2014 / 7:07 AM / 3 years ago

RPT-Fitch Downgrades Garuda to 'A-(idn)'; Outlook Stable

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April 8 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded PT Garuda Indonesia Tbk’s (Garuda) National Long-Term Rating to ‘A-(idn)’ from ‘A(idn)'. The Outlook is Stable. At the same time, Garuda’s outstanding IDR 2trn bonds due in 2018 have also been downgraded to ‘A-(idn)’ from ‘A(idn)'.

‘A’ National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Weaker Financial Profile: The rating downgrade reflects Fitch’s view of a sustained weakness in Garuda’s financial profile, primarily driven by currency mismatch and high fixed-cost structure. Garuda’s 2013 financial ratios breached Fitch’s thresholds that trigger negative rating action - FFO-adjusted leverage rose above the 6.5x threshold to 7.6x, while FFO fixed charge cover fell below the 1.25x trigger to 1.2x. Given the agency’s expectation that Garuda will continue to face a difficult operating environment, Fitch does not foresee significant improvement in profit margins or overall business profile in the next two to three years.

About 50% of Garuda’s revenue is denominated in or linked to the US dollar, whereas about 65% of its costs are denominated in US dollars. In addition, its low cost carrier (LCC), Citilink, has limited flexibility to adjust ticket prices to defend its margin amid tough competition in the Indonesian LCC sector.

This leaves Citilink especially vulnerable to depreciation in the Indonesian rupiah as its revenue is mostly denominated in rupiah while it main cost item, fuel, is in US dollars. Although fuel surcharges in effect since March 2014 will moderate margin pressures, the fact that more than 80% of the group’s fleet is leased increases Garuda’s fixed charges and hence, we think material improvement in its financial profile is limited.

Improved Connectivity: In Fitch’s view, Garuda will be able to gradually moderate its currency mismatches as its international routes increase and connectivity improves, especially now that the carrier is part of the Skyteam airline alliance. Nevertheless, given the fact that a majority of cash flows are domestic, substantial improvement in the currency mismatches is not expected within the rating horizon.

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 strong evidence of support and strategic linkage to the government.

Continued Strong Operating Metrics: Garuda reported continued growth in total passenger traffic of 22.3% in 2013. Citilink’s passenger growth outpaced Garuda‘s, with passenger traffic more than doubling to 4.2 million in 2013 from 1.7 million in 2012. As of 31 December 2013, the average age of Garuda’s fleet stood at 5 years (2012: 5.8 years) and it operated 140 aircraft (2012: 106) as it continued its rejuvenation initiatives. Garuda was also able to maintain solid domestic market share of about 28%, unchanged from 2012.

Improved Funding Access: While Garuda’s overall liquidity position remains weak, Fitch acknowledges that it has significantly improved its funding access. Garuda is planning for a rights issue in the first half of 2014, and may divest a 40% stake in Citilink to raise additional capital. These initiatives, coupled with improved access to bank borrowings, are an important support to Garuda’s weak liquidity profile.

RATING SENSITIVITIES

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

- FFO adjusted leverage at more than 7x on a sustained basis

- FFO fixed charge cover of less than 1.2x on a sustained basis

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

- FFO adjusted leverage at less than 6.5x on a sustained basis

- FFO fixed charge cover of more than 1.4x on a sustained basis

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