Fitch Ratings has today downgraded PT Arpeni Pratama Ocean Line Tbk long term foreign and local currency Issuer Default Ratings (IDR) to C from CCC, and its national long-term rating to C(idn) from B+(idn).
The rating on Arpeni's US$ senior unsecured notes due 2013 has also been downgraded to C from CC'. The Recovery Rating of the US$ notes has been lowered to RR6 from RR5. Fitch has removed the ratings from rating watch negative. The agency is not providing a Rating Outlook due to the high level of credit risk inherent in a C IDR.
These rating actions follow the publication of Arpeni's financial statements for the nine-month period to end-September 2009, which showed a significantly weakened balance sheet and liquidity, despite a marginal improvement in EBITDA.
Fitch believes that Arpeni's dismal liquidity and weaker-than-expected operating cash generation are likely to result in a debt restructuring that may constitute a Coercive Debt Exchange (CDE) under Fitch's CDE criteria.
Arpeni's indebtedness increased driven by liabilities relating to derivatives, which rose to IDR606 billion at 30 September 2009 versus IDR194 billion at 30 June 2009.
Arpeni's indebtedness increased driven by liabilities relating to derivatives, which rose to IDR606 billion at 30 September 2009 versus IDR194 billion at 30 June 2009.
At the same time, Arpeni's unrestricted cash balances fell to around US$12 million from US$70 million. In Q309, the company provided US$30 million of its cash reserves as collateral for loans of related parties, which Fitch notes raises questions on corporate governance. Moreover, working capital facilities due December 2009 and January 2010, which are typically rolled-over for one year, have been rolled-over for only three months.
The company's accounts receivable still remain high with a balance of IDR1.21 billion at September 2009 (IDR1.425 billon a quarter earlier). Fitch notes that the age profile of receivables has deteriorated sharply, with more than 50% of the receivables due for more than 90 days (and over a quarter due more than 180 days) at September 2009, compared to 4% at December 2008. As such, the adequacy of the IDR51 billion provision made in Q3 2009 remains questionable.
As highlighted by Fitch in 2009, Arpeni does not comply with financial covenants on its debt obligations. As per management, Arpeni has, to date, not received any notice of default from its lenders for breach of financial covenants. However, the agency notes the situation with concern, given the cross default provisions attached to many of Arpeni's debt obligations and its current weak liquidity. Several derivative contracts were unwound in December 2009, resulting in the crystallisation of a liability of US$33m. At the same time, Arpeni is in discussions with its secured bank lenders for a standstill on principal payments until end-March 2010.
Arpeni's management is of the view that recovery of accounts receivables and a recapitalisation exercise by end-March 2010 can help the company avert a debt restructuring. However, given the challenges highlighted above, Fitch believes that the likelihood of a debt restructuring is imminent.
The recovery rating on the US$ notes has been lowered to RR6 to recognise the lower recovery prospects for noteholders in the event of a default given higher liabilities stemming from derivatives, and the weaker quality of its accounts receivables.
The company's accounts receivable still remain high with a balance of IDR1.21 billion at September 2009 (IDR1.425 billon a quarter earlier). Fitch notes that the age profile of receivables has deteriorated sharply, with more than 50% of the receivables due for more than 90 days (and over a quarter due more than 180 days) at September 2009, compared to 4% at December 2008. As such, the adequacy of the IDR51 billion provision made in Q3 2009 remains questionable.
As highlighted by Fitch in 2009, Arpeni does not comply with financial covenants on its debt obligations. As per management, Arpeni has, to date, not received any notice of default from its lenders for breach of financial covenants. However, the agency notes the situation with concern, given the cross default provisions attached to many of Arpeni's debt obligations and its current weak liquidity. Several derivative contracts were unwound in December 2009, resulting in the crystallisation of a liability of US$33m. At the same time, Arpeni is in discussions with its secured bank lenders for a standstill on principal payments until end-March 2010.
Arpeni's management is of the view that recovery of accounts receivables and a recapitalisation exercise by end-March 2010 can help the company avert a debt restructuring. However, given the challenges highlighted above, Fitch believes that the likelihood of a debt restructuring is imminent.
The recovery rating on the US$ notes has been lowered to RR6 to recognise the lower recovery prospects for noteholders in the event of a default given higher liabilities stemming from derivatives, and the weaker quality of its accounts receivables.
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