Fitch Ratings has downgraded
Fitch has also affirmed PB's
The downgrade to 'RD' follows events of default due to non-payment under various banking facilities and the expiry of the standstill agreement period on
'RD' National Ratings indicate an issuer that, in Fitch's opinion, has experienced an uncured payment default on a bond, loan or other material financial obligation but that has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and has not otherwise ceased business.
KEY RATING DRIVERS
Missed Payment: The downgrade reflects the non-payment under banking facilities following the expiry of the standstill agreement. Accordingly, the banks may elect to accelerate and enforce the bilateral loans and
The company continues to negotiate with the banks in respect of an extension the standstill period from
Lengthy Negotiations: PB is also continuing discussions with lenders and targets to finalise the terms of the loan extension by
Negative Cash Flow: PB's cash flow from operations is consistently negative because its business requires heavy working capital. New customer acquisitions have stretched the working-capital cycle. PB plans to shorten the working-capital cycle with technology and automation, and is reviewing its raw-material supply with a preference for local suppliers. However, the working-capital revamp will take time and, therefore, PB's growth remains reliant on external funding, which may prove to be challenging given the negotiations with its existing lenders on its defaulted loans.
ESG - Governance: PB has an ESG Relevance Score of '5' for Management Strategy because of management's inability to complete the extension of the syndicated loan before maturity. There are also higher refinancing risks as PB continues to negotiate with banks without receiving formal approval to extend the standstill agreement period.
DERIVATION SUMMARY
PB's downgrade to 'RD' reflects the payment default on its bilateral loans and
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Net sales growth of 5% in 2020, 2% in 2021 and around 8% in 2022-2023 (2019: 9%);
EBITDA margin of between 9% and 10% in 2020-2023 (2019: 9%);
Capex of around 2% of revenue in 2020-2023 (2019: 2%).
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that PB would be reorganised as a going-concern in bankruptcy rather than liquidated. We assume a 10% administrative claim
Going-Concern Approach
The going concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation.
We estimate EBITDA at
An enterprise value multiple of 5x EBITDA is applied to the going-concern EBITDA to calculate a post-reorganisation enterprise value. The multiple reflects a discount from the median global multiple of 9x for completed M&A transactions in the textile industry over the past decade, based on Bloomberg data. The 5x multiple also reflects PB's smaller size compared with global manufacturers.
We also assume fully drawn syndicated and short-term loan facilities - which have priority over senior unsecured debt - to the extent allowed by the bond indenture.
The going-concern enterprise value covers 71%-90% of PB's unsecured debt, corresponding to a 'RR2' Recovery Rating for the senior unsecured notes after adjusting for administrative claims. Nevertheless, Fitch has rated the senior unsecured bonds 'C'/'RR4', because, under our Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch will reassess PB's capital structure and liquidity when the extension of the
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch will further downgrade to 'D' if PB enters into bankruptcy proceedings, administration, receivership, liquidation or other formal winding-up procedures or if it ceases operations.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Standstill Expired: We view PB's refinancing risk as high, given the company is still in lengthy negotiations with banks to finalise the extension terms of its
The company's liquidity to fund its operations remains tight with the potential delay of the launch of the
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch includes advance payments, which are mostly for raw materials, as part of the working-capital calculation.
Fitch assumes
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
PB has an ESG Relevance Score of '5' for Management Strategy due to management's inability to complete the extension of the syndicated loan before its maturity while its standstill agreement period has expired. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
PT Pan Brothers Tbk LTIDR RD Downgrade C
Natl LT RD(idn) Downgrade C(idn)
senior unsecured
LTC Affirmed RR4 C
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
(C) 2021 Electronic News Publishing, source