Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on Indonesia-based pulp and paper company PT Fajar Surya Wisesa Tbk (Fajar) to B+ from B. The outlook is stable.
At the same time, we raised the rating on the senior secured notes issued by Fajar Paper Finance B.V. and guaranteed by Fajar to B+ from B.
"We raised the rating on Fajar to reflect our expectation that the company can continue its strong operating performance over the past year. In addition, Fajar's existing capacity will significantly increase after a new paper machine is operational. Fajar has also secured bank facilities in order to refinance its existing senior secured notes due October 2011," said Standard & Poor's credit analyst Weekhim Loy in a press statement.
Fajar's operating performance started to improve in the second half of fiscal ended December 2009, helped by a recovery in the demand and price of paper products, which has strengthened the company's cash flows. "We expect price and demand for packing paper to remain robust, reflecting healthy growth prospects for Indonesia. We also anticipate that Fajar's proportion of domestic sales, which have higher margins than exports, will remain at more than 95% of total sales."
Fajar's fifth paper machine will come on stream in the first quarter of fiscal 2011. This will increase its capacity by about 50%. The company also plans to modify two of its existing machines at a moderate capital expenditure, further adding to capacity.
In line with continued improvement in demand, S&P expects the company's capacity utilization to be close to 100% in the next few quarters.
"We believe Fajar has demonstrated prudence by securing US$120 million in a syndicated credit facility to refinance its existing senior secured notes due October 2011. This substantially mitigates refinancing risk."
The credit facility has lower interest rates than existing notes and it amortizes over five years. Fajar should also be able to secure sufficient funds for the modification and debottlenecking of two paper machines (PM2 and PM7) over the next 2 years. "We expect Fajar to service its debt-service obligations without difficulty," said Loy.
"Fajar's financial risk profile has improved over past year. While we expect the proposed capital expenditure for the PM2 and PM7 modifications to increase Fajar's debt, we don't believe this will significantly weaken the company's debt-to-EBITDA ratio, which should benefit from an improving operating environment and better margins."
"In our opinion, Fajar's debt-to-EBITDA ratio, which was 2.7x at September 2010, will weaken only moderately to about 3.0x in fiscal 2011 and reduce thereafter as its bank loan amortizes."
S&P believes Fajar's liquidity is adequate. It can use US$100 million of its US$120 million syndicated credit facility to refinance its senior secured notes maturing in October 2011 and the remainder for general corporate purposes. The company also has a credit facility of about US$40 million for general corporate purposes.
"In our view, Fajar's debt maturity profile will be manageable following the refinancing of the notes. We expect the company to generate funds from operations of more than US$40 million and that it will comply with the covenants without difficulty."
Disclosure: No position at the stock mentioned above.
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