PT Delta Merlin Dunia Textile Assigned 'BB-' Rating With Stable Outlook; Notes Rated 'BB-'


  • We equalize the rating on PT Delta Merlin Dunia Textile (DMDT) with our view of the creditworthiness of Duniatex Group, reflecting the company's core subsidiary status. We assess DMDT's stand-alone credit profile as 'bb'.
  • Duniatex Group's higher leverage than DMDT's and its high level of short-term working capital debt constrains its credit profile. Its strong operating performance and stable track record provides some support.
  • We have assigned our 'BB-' long-term issuer credit rating to DMDT. We also assigned our 'BB-' long-term issue rating to the Indonesia-based textile weaving company's US$300 million senior unsecured notes.
  • The stable outlook on DMDT reflects our expectation that Duniatex Group will maintain its market position in Indonesia's textile industry over the next 12 months.
SINGAPORE (S&P Global Ratings) March 13, 2019--S&P Global Ratings today 
assigned its 'BB-' long-term issuer credit rating to DMDT. We also assigned 
our 'BB-' long-term issue rating to the Indonesia-based textile weaving 
company's US$300 million senior unsecured notes.

The rating on DMDT reflects our view of the creditworthiness of the broader PT 
Duniatex Group. We assess the company as a core subsidiary and having a 
stronger stand-alone credit profile (SACP). The company successfully raised 
US$300 million as part of its refinancing plan to better structure its balance 
sheet. The rating is in line with our preliminary rating on DMDT assigned on 
Feb. 25, 2019. 

We view DMDT as core to the group's operations, given its substantial revenue 
and profit contribution. The company is a key player in the group's weaving 
business, and plays an important role by connecting the upstream spinning 
business with the midstream dyeing and finishing business. Given the closely 
intertwined operations and brand name, DMDT's weaving operation is integral to 
the broader group, in our view.

Our assessment of Duniatex Group reflects its higher leverage and dependence 
on short-term working capital debt. At the same time, the group has a strong 
market position in the domestic textile market with strong and stable 
profitability. In contrast, DMDT has lower leverage than the wider group and a 
much better liquidity position. We expect the company's liquidity to improve 
because it plans to use its proceeds from the notes largely to refinance 
short-term working capital debt. 

Duniatex Group is the largest vertically integrated textile manufacturing 
group in Indonesia, with revenue of Indonesian rupiah (IDR) 19 trillion and 
EBITDA of IDR6 trillion. It is twice the size of PT Sri Rejeki Isman Tbk., its 
closest competitor. Duniatex Group has a strong market presence domestically, 
especially in the weaving business. The group has a good ability to manage 
costs, with above-average EBITDA margins of more than 30%. We similarly expect 
DMDT to have EBITDA margins of marginally above 20%.

While Duniatex Group has a larger scale than DMDT's, it is small relative to 
global peers such as Shandong Ruyi Technology Group Co. Ltd., which has 
revenue almost 4x Duniatex Group's. The group's business is still highly 
dependent on the domestic market, with only about 10% of sales to the export 
market. The small scale and limited geographic diversification leaves the 
group vulnerable to volatile demand in a downturn, in our view.

While DMDT has adequate debt-servicing capability on a stand-alone basis, the 
group's weaker credit profile, due to its higher leverage and weaker 
liquidity, constrains the ratings to 'BB-'. We see some liquidity risk at the 
group level, given it needs to roll over approximately IDR5.4 trillion of 
short-term working capital every 12 months. However, management has a track 
record of successfully rolling over these short-term loans, which tempers the 
risk.

We also expect stable operating performance at the group level, which should 
mitigate some of the liquidity risks. Overall, the group is likely to maintain 
stable growth over the next three years, resulting in moderate cash flow 
generation. The group has a track record of stable top-line growth and prudent 
expansion, in line with market's ability to absorb the supply. However, the 
group has historically faced volatile working capital movements, which hampers 
its ability to convert earnings to cash. 

Leverage across the group is higher than at DMDT, with debt mainly geared 
toward expanding facilities. We see some risk that the group will undertake 
larger capital spending than we expect, driving up leverage. However, we 
believe the group has some headroom to tolerate some debt increases, given 
that its credit ratios are supported by strong top-line earnings. Barring any 
outsize debt-funded capital expenditure, we expect the group to maintain its 
ratio of funds from operations (FFO) to debt at about 18% (including 
shareholder loans). DMDT should maintain this ratio at 21%-26% for the next 
two to three years.

Duniatex Group has a track record of shareholder support, which could help 
bolster liquidity in the case of stress. We see a demonstrated commitment by 
key shareholders to help shore up capital through infusion of shareholder 
loans. Up to IDR2.7 trillion of non-interest bearing subordinated loans have 
been injected across the group. However, the business remains fundamentally 
family-owned, and shareholders do not have any public commitment or obligation 
to maintain liquidity levels.

The stable outlook on DMDT reflects our expectations that Duniatex Group will 
maintain its leading market position and have steady operating performance 
over the next 12-24 months, while keeping its financial leverage at or below 
the current level. We also do not expect the group to face challenges in 
rolling over its short-term working capital debt.

We could downgrade DMDT if we lower our assessment of Duniatex Group's credit 
profile. This could happen if the group's FFO-to-debt ratio deteriorates below 
15%, possibly on account of outsized debt-funded capital expenditure or 
significant adverse working capital movements. Our group assessment could also 
come under pressure if we believe the group faced challenges in rolling over 
its working capital facilities. 

We may lower our assessment of DMDT's SACP by one notch if we anticipate that 
the company's FFO-to-debt ratio will fall below 20%. This may happen if the 
company undertakes higher-than-expected capital spending or faces significant 
adverse working capital movements. However, this would not affect the final 
rating.

We could raise the rating on DMDT if we raise our assessment of Duniatex 
Group's credit profile. However, upside potential is limited over the next 12 
months, given the high level of short-term debt in the group's capital 
structure. However, we could raise our assessment if the group significantly 
reduces its dependence on short-term debt. In addition, we would expect some 
improvement in the group's financial position, with the FFO-to-debt rising to 
stay above 20%. This assumes that DMDT will maintain its strong relationship 
with the group.
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