PT Delta Merlin Dunia Textile Rating Lowered To 'CCC-' Due To Mounting Debt Servicing Challenges; Outlook Negative

  • Duniatex group's spinning company failed to service its debt obligations last week due to liquidity challenges from tough market conditions.
  • Trading conditions in the Indonesian textile market have collapsed due to weak domestic sentiment and oversupply stemming from U.S.-China trade tensions. We believe a recovery in the short term is unlikely.
  • As business turmoil spills over, PT Delta Merlin Dunia Textile (DMDT) could also face challenges in servicing its syndicated loans, of about US$5 million, due in September. However, the company should be able to pay the interest on its US$300 million senior unsecured notes in that month.
  • On July 16, 2019, S&P Global Ratings lowered its long-term issuer credit rating on DMDT and its long-term issue rating on the company's senior unsecured notes to 'CCC-' from 'BB-'.
  • The negative outlook indicates a risk that DMDT may not be able to timely service its syndicated loans in September 2019.
SINGAPORE (S&P Global Ratings) July 16, 2019--S&P Global Ratings today took the rating actions listed above. We downgraded DMDT because the company is facing significant liquidity challenges, which could result in its inability to service its syndicated loans in September 2019. In addition, we believe weak liquidity at parent group Duniatex may also affect DMDT. Significant deterioration in Duniatex group's liquidity has resulted in missed payments at the spinning company PT Delta Dunia Sandang Tekstil (DDST) starting last week. The group is also in the process of appointing a consultant to restructure DDST's loans.
Duniatex's liquidity and operating performance was adversely affected by stretched working capital and plummeting prices resulting from the oversupply of imported cheap fabric from China. The ongoing U.S.-China trade tensions are significantly hurting the Indonesian textile market. Following the U.S.-imposed tariffs of 25% on Chinese imports, Chinese producers have started redirecting their products to more hospitable destinations, including Indonesia, from May onwards. This coincided with weakened domestic demand in Indonesia due to the general elections.
In our view, DMDT's liquidity has also significantly weakened due to adverse market conditions. As of March 31, 2019, the company has about US$50 million in cash and cash equivalents, which was sufficient to manage its obligations in the subsequent quarter. However, we believe that the situation has now changed such that DMDT could face challenges in meeting its debt servicing obligations in September 2019, particularly on its syndicated loans, which we estimate to be about US$5 million. The company has the funds in the interest reserve account for its senior unsecured notes to meet the interest obligations of about US$13 million due in September 2019.
DMDT's operations are also likely to suffer in the next few months because of the group's liquidity pressures. This is because Duniatex group's spinning companies, including DDST, are the key suppliers to DMDT. We believe lack of adequate liquidity and working capital support from banks could hamper production at the spinning companies.
The negative outlook reflects the risk of DMDT being unable to service its syndicated loans in September 2019. The outlook also reflects the potential risk of adverse action by bondholders if the company were not to abide by its covenants.
We may lower the rating on DMDT to 'SD' if the company fails to service its debt obligations in a timely manner. This could happen as early as September 2019, given the company's syndicated loan. We may also lower the rating to 'D' if the group includes DMDT in a debt restructuring exercise.
An upgrade is unlikely given DMDT's operating challenges. An upgrade will be contingent on DMDT having sufficient liquidity to meet its obligations over the next 12 months, a scenario that would require an operating recovery at the company. Moreover, we would raise the rating only if believe there is no risk of acceleration of DMDT's debt obligations and the group has no plans to restructure the company's debt.
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