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Investing.com -- On February 21, 2025, S&P Global Ratings upgraded the long-term issuer credit rating of Indonesian power utility Cikarang Listrindo PT from ’BB+’ to ’BBB-’ due to the company’s reduced refinancing risk. The rating of the company’s senior unsecured notes was also upgraded. These upgrades are attributed to the company’s strong financial performance, steady cash flow, and proactive management, which will allow it to refinance its $500 million bond maturity in September 2026 well in advance.
The company’s financial risk associated with the upcoming bond maturity has eased as it is in advanced discussions to refinance the $500 million bond at least 12 months before maturity. In November 2024, Cikarang obtained shareholders’ approval to refinance the bond at a maximum interest rate of 7.0%.
Cikarang is expected to pay off a significant portion of its outstanding bond with cash and internal accruals, thanks to its sizable cash balance of about $445 million as of December 31, 2024, stable financial performance, and flexibility to defer capital expenditure. The company is expected to refinance only $100 million-$150 million of the outstanding bond with debt.
The company’s strong financial ratios are expected to continue. S&P Global Ratings forecast that Cikarang’s ratio of funds from operations (FFO) to debt will exceed 100% and its net debt-to-EBITDA ratio will be less than 1.0x over the next two to three years. The company is expected to generate at least $70 million in free operating cash flows annually.
Cikarang is expected to maintain dividend discipline, with shareholder distributions anticipated to remain high at $60 million-$65 million annually. The company’s leverage tolerance is higher than the base case expectations, with a publicly stated target of a net debt-to-EBITDA ratio of up to 3.0x.
Cikarang is also expected to pursue growth opportunities to expand and diversify its fuel mix, focusing on gas, biomass, or solar projects. However, any sizable and debt-funded investments could significantly increase leverage beyond the base case. This risk is reflected in the negative assessment of the company’s financial policy.
Despite a disruption in gas supply from Perusahaan Gas Negara Tbk. PT (PGN) that will persist until 2026, Cikarang’s strong operational fundamentals support stable cash flow. Power demand from the company’s industrial customers was resilient in 2024, growing 1.7% after a 4.2% fall in 2023. Softer demand growth of 0.5%-1.0% is expected over the next two to three years.
The stable outlook for Cikarang is based on expectations of stable cash flow and efficient operations over the next 12-24 months, ensuring its ratio of FFO to debt stays above 60%. The company is also expected to refinance its bond maturing in September 2026 at least 12 months in advance.
The rating could be lowered if refinancing risk unexpectedly increases, or if Cikarang adopts a more aggressive leverage policy with a ratio of FFO to debt approaching 45% on a sustainable basis. A rating increase is unlikely unless Cikarang significantly expands and diversifies its capacity while maintaining a conservative capital structure and lower leverage tolerance.
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