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Fitch downgrades Garuda to 'BBB+ (idn)'; revises outlook to negative

[JAKARTA] Fitch Ratings Indonesia has downgraded PT Garuda Indonesia Tbk's (Garuda) national long-term rating to'BBB+(idn)' from 'A-(idn)'. The Outlook is revised to Negative from Stable.

At the same time, Garuda's outstanding IDR2trn bonds due in 2018 have also been downgraded to 'BBB+(idn)' from 'A-(idn)'.

'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.

Key rating drivers

Weaker Financial Profile: The rating downgrade reflects Fitch's view of a sustained weakness in Garuda's financial profile, primarily driven by currency mismatch and a high fixed-cost structure. Fitch expects Garuda's 2014 financial ratios to breach thresholds that trigger negative rating action - FFO-adjusted leverage is likely to have risen above the 7x threshold to 11x, while FFO fixed charge cover likely fell below the 1.2x trigger. Although Fitch expects the metrics to improve in 2015 due to low jet fuel costs, the company's fundamentals remain weak and the operating environment remains challenging.

The negative outlook reflects Fitch's expectation that Garuda's financial metrics will remain in breach of the negative rating triggers in the coming 12-18 months, and a significant turnaround is unlikely given the company's current operations and the highly competitive industry environment.

State Support: Garuda's rating incorporates two notches of support from the government of Indonesia (BBB-/Stable). The uplift is primarily driven by the government's majority ownership of Garuda, which is the nation's largest carrier, and implied benefits associated with linkage to the government, including on-board immigration services. The fact that there has been direct financial support in the past is another strong evidence of support and strategic linkage to the government.

Ambitious International Expansion: Garuda's ambitious expansion in international routes in the past couple of years has contributed to its deteriorating financial profile. It failed to reach optimum load factors in long-haul, international routes, which are a drag on its operating profile and profitability. 9M14 consolidated passenger yield and load factor fell by 5.4 per cent and 3.9 per cent respectively from a year earlier, with a notable decline in the load factor for international routes to 65.4 per cent from 73.1 per cent a year earlier.

No Immediate Liquidity Pressures: Liquidity is supported by US$393 million in cash compared with US$373 million in short-term debts as of Sept 30, 2014. The airline also has available working capital lines and significant unencumbered assets of US$1.9 billion as at end-September 2014. Garuda just obtained additional working capital lines totalling US$110 million from PT Bank Rakyat Indonesia Tbk (BBB-/Stable/AAA(idn)), has received bridging loans from National Bank of Abu Dhabi and Dubai Islamic Bank to refinance maturing debts in 2015. The latter two banks are committing to provide unsecured loans of up to US$400 million. Garuda plans to replace the bridging loans by issuing unrated Global Reg-S bonds in 2015.