Fitch Assigns 'BB-' Rating to Indonesia's Berlian Laju Tanker; Outlook Stable

Fitch Ratings has today assigned Long-term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) of 'BB-' (BB minus) to Indonesia-based PT Berlian Laju Tanker Tbk (BLT). The Outlook for the ratings is Stable. Fitch has also assigned an expected rating of 'BB-' (BB minus) to the proposed USD200 million senior unsecured notes due 2014 to be issued by BLT Finance B.V. and guaranteed by BLT. The final ratings are contingent upon receipt of documents conforming to information already received.

BLT's ratings are supported by its leading position as the largest shipping company in Indonesia, established track record and its ability to remain profitable through industry downturns. In addition, due to its younger, more modern fleet with an average fleet age of 10.6 years, it is able to meet increasingly stringent industry regulations, providing it an edge over some of its peers. The young fleet age also means that in times of distress, BLT may be able to fetch higher resale prices for its vessels, thereby increasing financial flexibility. Fitch also recognises that BLT benefits from an experienced senior management team with all team members having spent at least eight years in BLT and most of them at least ten years in the shipping industry.

However, BLT's ratings are constrained by the cyclical, competitive and fragmented nature of its key business, liquid bulk cargo shipping. Although based in Indonesia, BLT derives around 85% of its revenues from outside the country, primarily the intra-Asian market. In all three segments that BLT operates in - chemical, oil, and gas tankers - contracts are typically priced off industry benchmarks, the levels of which are determined by overall supply and demand dynamics. In the chemical tanker segment, which contributed to 52% of its total revenue in 2006, BLT is one of the largest players in Asia, both by tonnage and by number of ships, but its market position does not appear to provide it enhanced pricing powers. BLT's size, however, allows it to bid for larger contracts such as those from multinationals and regional trading companies.

In addition, the contribution from the inherently more volatile spot contracts - as opposed to the somewhat more long-term contracts of affreightment (COA) and time charters - increased to 51% of the company's total revenue in 2006 from 27% in 2003. Fitch notes that this strategy was adopted to boost the company's profits given the remarkable rise in spot rates during these years. BLT also intends to continue relying on spot rates for around 50% of its revenue. Although this balance allows BLT the flexibility to benefit from any further increases in spot rates, predictability of earnings and operating cash flow is lower. However, the reliance on COAs and time charters for at least 50% of revenue is viewed positively as it not only reduces revenue volatility, but also somewhat insulates BLT from any further rise in bunker costs. This is because the COAs typically include bunker adjustment clauses while the charterer bears the full bunker costs in the case of time charters.

BLT's ratings are also constrained by its aggressive capital expenditure program. The company spent USD615m since 2003 to increase its fleet capacity by 260% to 1.52m deadweight tons (DWT) as at end 2006. Although the expansion resulted in improved earnings and operating cash flow given the high utilisation rates, BLT has persistently generated negative free cash flow due to the scale of the capex. This trend is unlikely to change in the near term as the company plans to spend approximately an additional USD500m in the next three years for building new vessels and acquiring second-hand ships, thereby increasing its fleet capacity in terms of DWTs by around 50%.

Despite some equity injection in the past, the fleet expansion has resulted in moderately high financial leverage, as reflected by the 3.3x net adjusted debt/EBITDAR ratio registered in 2006. Fitch estimates that following the planned debt issuance of USD400m, including the proposed notes, the ratio will rise to 4.2x in 2007, but is likely to be reduced after that. However, the increased operating cash flow contribution from the existing and new vessels is expected to enable interest coverage to remain moderately strong, with the FFO/gross interest expense ratio staying above 4x.

The Stable Outlook reflects Fitch's expectation that BLT will continue to generate positive operating cash flow at least in line with its 2006 performance, and reduce its financial leverage. A sustained reduction in operating cash flow and/or an increase in debt-funded capex beyond the planned levels may result in a negative rating action. The demonstration of an ability to generate positive free cash flow and sustain low levels of financial leverage through an industry downturn may result in a positive rating action.

The ratings have also taken into account BLT's intention to prepay about USD180m of secured ship loans this year. Without the prepayment, secured debt as a percentage of total debt will remain high at about 48%. Thus, negative rating actions on the IDR and the expected issue rating may be taken if the prepayment is not completed as planned in 2007.

BLT is the largest Indonesian shipping company, focusing on liquid bulk cargo, with operations primarily in Asia with some expansion into the Middle East and Europe. In 2006, BLT achieved revenue of USD335m, EBITDA of USD154m and net income of USD107m. The founder, Mr Hadi Surya, has a 48.7% beneficial interest in BLT.