Moody's Investors Service has upgraded to B3 from Caa1 the corporate family rating for PT Gajah Tunggal Tbk and its senior secured rating for the US$435 million bonds issued by GT 2005 Bonds BV, and guaranteed by the company. The outlook for the ratings is stable.
"The rating upgrade captures Gajah Tunggal's better-than-expect operatingperformance and credit metrics, as the company enjoys the beneficialeffects of a resilient domestic economy in Indonesia and lower raw material prices," says Wonnie Chu, a Moody's Analyst.
Gajah Tunggal reported very strong consolidated credit metrics for for year 2009, including Debt/EBITDA of below 3x and RCF/net debt of over 30%, and which both exceeded Moody's expectations.
Although its credit metrics will likely moderate in FY2010 -- on the back of increasing raw material prices -- projected Debt/EBITDA of around 5x in the next 1-2 years remains strong for the B3 rating level.
"In addition, the improved performance has translated into strong balance sheet liquidity for the company," says Chu.
However, the B3 rating also reflects our concerns over Gajah Tunggal's exposure to volatile raw material prices and foreign exchange fluctuations. Moreover, the rating is constrained by the company's history of debt restructuring and weak back-up liquidity arrangements. The stable outlook reflects Moody's expectation that Gajah Tunggal can manage its capital expenditures with its balance sheet cash and operating cash flow in the absence of any material debt repayments in the next 12 months.
The rating could face upward pressure if Gajah Tunggal can demonstrate an ability to generate sustainable cash flow generation through the cycle and, at the same time, if there is an improvement in debt leverage, such that adjusted debt/EBITDA falls below 4.0 -- 5.0x on a sustained basis.
On the other hand, Gajah Tunggal's ratings could experience downward pressure if its credit profile weakens, such that there is little buffer for its interest payments and debt obligations, or Debt/EBITDA exceeds 7.0 -- 8.0x over the cycle.
The last rating action was taken on Jul 27, 2009, when the company's corporate family and senior unsecured bond ratings were upgraded to Caa1. Gajah Tunggal is Southeast Asia's largest integrated tire manufacturer. Its key products include tires for motorcycles, passenger cars and commercial and heavy equipment vehicles. Giti Tire, a Chinesetire manufacturer, is a 44.83% shareholder in Gajah Tunggal through its subsidiary, Denham Pte Ltd.
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