Rating PT Gajah Tunggal Rating Raised To 'B

Standard & Poor's Ratings Services raised its corporate credit rating on Indonesia-based tire manufacturer PT Gajah Tunggal Tbk. to B- from SD. The outlook is stable.
At the same time, we assigned a B- rating to the senior secured US$435 million bonds due July 2014 and withdrew the rating on the US$420 million bonds due in 2010, following the completion of the exchange offer.
The 2014 bonds are issued by GT2005 Bonds B.V. and are guaranteed by Gajah Tunggal.The rating reflects Gajah Tunggal's high leverage, weak cash flow measures, and inherent industry risks. These risks are partially offset by Gajah Tunggal's favorable position in the domestic market, with more than 60% share for motorcycle tires based on sales volume, and its low-cost position, attributed largely to its integrated business model and low labor cost.
In our opinion, Gajah Tunggal's liquidity pressure has eased with the completion of the exchange offer, which lengthened its debt maturity profile and lowered interest expense. Coupon rate of the 2014 bonds has been reduced by half to 5% per annum (10.25% for 2010 bonds), gradually stepping up to 10.25% by 2014.
The company's total debt rose to US$435 million, from US$420 million, because of the capitalization of US$15 million of interest. "Gajah Tunggal is expected to remain highly leveraged and its weak cash flow measures are susceptible to economic downturn," said Standard & Poor's credit analyst Wee Khim Loy.
This is the second debt restructuring that the company has undergone. Gajah Tunggal had its debt restructured after defaulting on its foreign currency loans in 2001, as a result of the rupiah depreciation. The rating also factors in weak industry fundamentals, given the uncertain global economic condition, especially in the export markets, which accounts for about 40% of Gajah Tunggal's yearly revenue.
However, we do not expect further deterioration in export sales as most of Gajah Tunggal's overseas customers are gradually building inventories following improving consumer sentiment, especially from second-quarter 2009, Ms. Loy said.While domestic sales have been muted in fourth-quarter 2008 and first-quarter 2009, we expect tire demand in Indonesia to increase, on the back of improved economic sentiments and a fairly low interest rate financing environment in the country. Nevertheless, Gajah Tunggal remains exposed to underlying industry risks pertinent to the highly fragmented and competitive tire manufacturing sector.