S&P revises outlook on Indonesia-based packaging paper producer Fajar Surya Wisesa to negative from stable, affirms B+ long-term credit rating

NEW YORK , November 14, 2011 (press release) – -- Indonesia-based packaging paper producer Fajar could face difficulties in complying with its bank loan covenant.

-- We expect the company's debt to remain high and the improvement in its EBITDA to be limited.

-- We are revising the outlook on Fajar to negative from stable.

-- We are also affirming our 'B+' long-term corporate credit rating on the company.

Standard & Poor's Ratings Services said today that it had revised the outlook on Indonesia-based packaging paper producer PT Fajar Surya Wisesa Tbk. to negative from stable. At the same time, we affirmed our 'B+' long-term corporate credit rating on the company.

"The outlook revision reflects our view that Fajar's financial risk profile could weaken because the company could face difficulties in complying with its bank loan covenant," said Standard & Poor's credit analyst Vishal Kulkarni. The covenant requires Fajar to maintain a ratio of debt to EBITDA of less than 3.5x. As of June 30, 2011, the company was in compliance with this covenant, with the ratio at 3.4x. Fajar's compliance will be tested next on Dec. 31, 2011.

We believe Fajar is unlikely to be able to significantly increase EBITDA or reduce debt in the fourth quarter of 2011, and could breach the loan covenant. We expect Fajar's margins to remain under pressure for the next two to three quarters due to weak global macroeconomic conditions and the company's limited ability to pass on rising costs of raw material to end consumers. Fajar's EBITDA margins for the nine months ended September 2011 were slightly weaker than in the fiscal year ended December 2010 due to higher costs for a packaging paper manufacturing machine the company commissioned in the first quarter of 2011.

"Fajar is also unlikely to meaningfully reduce the debt it took to finance its working capital," said Mr. Kulkarni. "This is because we expect the company to use a major part of its cash flow to meet planned capital expenditure. A substantial improvement in cash flow is likely only from 2013 on the commissioning of new capacity."

Fajar maintains that a breach of covenant is unlikely. Nevertheless, we believe that the company's debt reduction and EBITDA improvement targets are aggressive and a timely and seamless waiver will be important to avoid a technical default on the covenant.

We may lower the rating if: (1) Fajar is unable to comply with the loan covenant, banks do not waive the covenant requirement, and they take negative action that jeopardizes the company's cash flow adequacy; or (2) Fajar takes up higher debt than we expected, its cost of raw material rises, or paper demand and prices weaken, such that the company's debt-EBITDA ratio is more than 4.0x on a sustained basis.

We are unlikely to raise the rating in the next one year. However, we may revise the outlook to stable if Fajar is compliant with the loan covenant with sufficient headroom. This may result from: (1) Fajar's stronger cash flows due to an improvement in the company's market position; (2) the company's stable margins due to a continued improvement in the operating environment; and (3) Fajar's adequate liquidity after considering capital expenditure.

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