Gajah Tunggal accused of covenant breach, Moody’s considering rating downgrade
Moody's Investors Service has placed PT Gajah Tunggal Tbk's B3 corporate family and senior secured ratings on review for possible downgrade. According to a report published in Indonesia Today, this review action follows “the payment of a dividend to shareholders seemingly in contravention of the covenants of its restructured bonds launched in June 2009, and the resulting alleged claim of covenant breach by an anonymous bondholder.”
Moody’s reports that more than 25 per cent of bondholders would need to agree to a declaration of covenant breach in order to enforce accelerated repayment of the bond, which matures in 2014. “The situation is somewhat unusual in that the dividend was paid last year without the potential covenant breach being disputed by bondholders, yet the dividend declared and paid this year – about US$5 million – is less than last year’s payment” said Alan Greene, a Moody’s vice president and senior credit officer.
“There seems to be some uncertainty as to the role and requirements of Indonesian Company Law with respect to the dividend payments. Moreover, if the cash dividend was approved by a meeting of shareholders, in the knowledge that the action could potentially accelerate the bond repayment, then this might indicate lapses in the area of corporate governance” Greene, who is also Moody’s lead analyst for Gajah Tunggal explained.
According to Indonesia Today, Gajah Tunggal’s financial metrics have broadly met expectations since Moody’s last rating action. As a result, the outcome of the review is expected to be “highly dependent on the crystallization of this potential event of default…An acceleration of the bond repayment would likely lead to a multiple notch downgrade.” However this is far from clear in what the credit ratings analysts themselves described as an unusual case.
Gajah Tunggal is currently said to produce 35 million tyres across the motorcycle, passenger car and commercial vehicle sectors. Exports accounted for 36 per cent of sales in 2010 and replacement market turnover accounted for almost 87 per cent of total tyre sales in last year’s full-year results. Giti Tire, the Chinese tyre manufacturer that is itself a wholly owned foreign entity operating within the People’ Republic, is a 48.89 per cent shareholder in the company through its subsidiary, Denham Pte Ltd. Compagnie Financiere Michelin holds a 10 per cent interest.
During the week before the Moody’s report hit the press, credit agencies Fitch and Standard & Poor’s altered their rating for China-based GITI Tire Pte. Ltd. However Standard & Poor’s Ratings Services said its rating for PT Gajah Tunggal Tbk is “unaffected by the downgrade” of GITI Tire Pte. Ltd. “We do not expect liquidity pressure at GITI to affect our assessment of Gajah Tunggal’s liquidity,” the credit analysts said at the time.