Distressed Indonesian Clothing Maker Drops to Record Lows

Distressed Indonesian apparel firm PT Pan Brothers has dropped to record lows in credit markets, adding to concerns about the nation’s clothing sector, which has been particularly vulnerable in the pandemic.

What’s happening:

PT Pan Brothers has made clothes for Ralph Lauren, Prada and Adidas. But in debt markets it’s lost its panache. The manufacturer’s dollar bonds have slid further to record lows of about 36 cents on the dollar. The declines come after it earlier postponed a new global debt offering and had to get a temporary extension from creditors on a loan in the U.S. currency.

Distressed Indonesian Clothing Maker Drops to Record Lows

The company and its subsidiaries need to repay or refinance $310 million of offshore debt this year and next, consisting of the loan and a $171 million bond that will mature in January 2022, according to data compiled by Bloomberg.

Its exports, which make up more than 80% of sales, stagnated in the first nine months of last year as the pandemic shuttered retail stores. The firm’s net profit rose 0.4% in that period to $19.2 million, the slowest pace in three years, according to its latest financial report.

Distressed Indonesian Clothing Maker Drops to Record Lows

Pan Brothers said in a Dec. 3 investor meeting that some customers had delayed payments and its financial statement shows net trade receivables increased 11% annually to $127.5 million in the January-September period.

Why it matters:

As the second-biggest listed clothing firm in Indonesia, Pan Brothers is signaling wider stresses in the industry. Apparel is one of Indonesia’s top 10 non-oil and gas exports, and the sector was among the hardest hit last year as the pandemic curtailed demand. Overseas shipments fell 18.7% annually, according to the nation’s statistics bureau.

Troubles for the sector may have a wider impact on the economy. A reduction in operations by apparel firms during the virus outbreak has added to the number of people laid off in the world’s fourth most populous nation. Clothing makers for years employed the second-highest number of people in the manufacturing sector, which is the main contributor to Indonesia’s gross domestic product. In 2020, they slumped to 13th place, government data show.

Rival PT Sri Rejeki Isman, the country’s biggest listed apparel firm, has also asked lenders for an extension on the maturity of a dollar loan.

Pan Brothers is continuing talks with banks for a new syndicated loan. The company had previously said it would use funds from the new global bond to settle its debt, but it may face a hard time attracting investors with the existing note trading in distressed territory.

What does the company say:

Pan Brothers expects to be able to proceed with the global bond sale in the second quarter to solve its refinancing issues. It’s ready to provide a corporate guarantee for the new notes and also use its own and the units’ assets as collateral, according to the offering prospectus.

Who are Pan Brothers:

Founded in 1980, the company which is based near Jakarta, produces clothes mainly for export. It said at the December meeting that it had 25 factories across three provinces in Indonesia that make 117 million clothing articles annually.

It ventured into making masks and other personal protective equipment in March after the pandemic disrupted business. While it initially produced PPE for domestic distribution, it received requests from overseas as well and such sales ended up accounting for $58 million, or 12.6%, of its total exports throughout January-September.

What do rating firms say:

Fitch Ratings cut Pan Brothers’ long-term issuer default rating and its existing unsecured dollar note to C from CC in February. It also downgraded the company’s national long-term rating to the same level, which denotes that a default or default-like process has begun, or the issuer is in standstill.

The clothing firm’s lengthy negotiations with lenders and short standstill period reflect its weak liquidity position and constrained access to alternative funding sources. The only resolution of the company’s capital structure is through restructuring, at which point Fitch could downgrade the issuer default rating to a restricted default level, according to a Feb. 1 note from Fitch.

Moody’s Investors Service cut Pan Brothers’ ratings in January to Ca from Caa1. The outlook remains negative, which reflects the additional uncertainty around the recovery rate for its dollar bond in the event of a default, analyst Stephanie Cheong said in a Jan. 15 report.

What are traders watching next:

The focus now is on whether Pan Brothers will be able to achieve a definite agreement with lenders on the syndicated loan. Investors are also watching if the company will be able to raise the funds it’s targeting with the planned bond offering, with an annual coupon that it says will be a maximum of 12%.

Two Indonesian companies with stronger ratings--Sri Rejeki and PT Tower Bersama Infrastructure--decided to pull their global bond sales due to what they called unfavorable market conditions.

©2021 Bloomberg L.P.

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