Fitch Assigns 'B+' Rating to ABM Investama's Proposed USD Notes

(Fitch Ratings - Singapore - 21 Jul 202)--  Fitch Ratings has assigned a rating of 'B+' with a Recovery Rating of 'RR4' to Indonesia-based PT ABM Investama Tbk's (B+/Stable) proposed US dollar notes. The proposed notes are rated at the same level as ABM's Issuer Default Rating, as they constitute its direct, unsubordinated and unsecured obligations. ABM plans to use the proceeds from the proposed notes to primarily repay its only US dollar note of USD350 million.

ABM's rating reflects its position as an integrated coal producer. Its coal-contracting business and coal mines, which together account for more than 65% of EBITDA, benefit from synergies with and diversification from its logistics and engineering arms.

Fitch expects further volume growth after a strong improvement in ABM's coal contracting business in the past year, led by new contracts and a ramp-up in production by existing customers following a decline in 2020. This will support operating cash flow and partly offset the deterioration in the mining segment's profitability. Fitch expects ABM's leverage to improve modestly and remain adequate for the rating over the next three years, excluding any acquisitions.

KEY RATING DRIVERS

Improved Contracting Volume: Fitch expects the overburden (OB) removal volume at PT Cipta Kridatama (CK), ABM's coal-contracting subsidiary, to rise to about 200 million bank cubic metres (mbcm) in the next three-to-four years. CK recorded 140mbcm in OB volume in 2020, higher than Fitch's expectation and similar to 2018 before CK lost its key customer, Toba Bara, in early 2019. CK's new contracts are signed for the mines' life, providing better long-term volume visibility and lower renewal risk than its earlier short-term contracts.

Weakening Coal Mining Profitability: Fitch expects the mining segment's profitability (EBITDA/tonne) over the medium term to decline by almost half from around USD8 in 2021 due to lower production volume at ABM's PT Tunas Indi Abadi (TIA) mine. ABM's other mines - PT MIFA Bersaudara and PT Bara Energi Lestari (BEL) - produce lower calorific value coal, resulting in lower profitability. We expect production volume to rise to about 15 million tonnes (MT) in the next two-to-three years (1Q21: 3.6MT, 2020: 12MT), with higher volume at MIFA and BEL offsetting TIA's decline.

Acquisition an Event Risk: ABM plans to acquire a coal mine to improve the profile of its coal mining portfolio and replenish the depleting coal reserves at its key mine, TIA, but has not yet finalised any deal. TIA has only a three-year reserve life at 2020 production levels of 3.4MT. Fitch has not factored in any acquisitions in our assessment and will treat them as an event risk. MIFA and BEL had coal reserves of about 203MT and 32MT, respectively, as of end-2020.

Stronger Cash Flow: Fitch expects higher coal contracting volume to improve ABM's operating cash flow, despite weaker profit from the coal mining segment, based on our coal-price assumptions. We forecast ABM's EBITDAR will range between USD220 million-260 million (1Q21: around USD76 million) over the next three years after deteriorating to around USD130 million over the past two years.

Moderate Capex, Improving Credit Metrics: We expect average annual capex of about USD75 million (2020: USD71 million) over the next four years. The capex will mainly be for CK's maintenance and capacity expansion. The moderate capex and stronger operating cash flow will help funds from operations (FFO) adjusted net leverage improve to and remain below 2.0x (2020: 2.9x) over the next three years. However, rising operating lease expense, part of ABM's asset-light strategy, will constrain average FFO fixed-charge coverage to 3.0x (2020: 2.2x).

Integrated Business Model: ABM benefits from an integrated business model, with four businesses across the value chain. These businesses - coal mining contracting, coal mining, logistics and engineering - create synergies and enable ABM to offer services across the value chain.

Affiliate Relationships: ABM benefits from relationships with affiliated companies, including PT Trakindo Utama, a long-term distributor of Caterpillar Inc. (A/Stable), which provides most of the equipment, spare parts and servicing for ABM's coal contracting business. Trakindo is also an important customer of ABM's logistics and engineering businesses.

Exposure to Cyclical Coal Industry: ABM is vulnerable to the commodity cycle, as around 80% of its EBITDA and cash flow is derived from the coal industry. This risk is mitigated by its integrated business model.

DERIVATION SUMMARY

ABM's closest peer is PT Bukit Makmur Mandiri Utama (BUMA, BB-/Negative). ABM benefits from diversification across business segments and a stronger financial profile, but its core contracting business is weaker than BUMA's, justifying a notch of difference in its credit assessment, in our view. BUMA has higher market share and a better customer base. It is Indonesia's second-largest mining contractor, with annual OB volume that is almost twice that of ABM. The Negative Outlook on BUMA's rating reflects its low rating headroom, as we expect its credit metrics to remain close to its negative sensitivities.

ABM can be compared with coal mining peer PT Golden Energy Mines Tbk (B+/Stable), which we assess based on the consolidated credit profile of parent Golden Energy and Resources Limited (GEAR, B+/Stable). GEAR has a longer reserve life, higher operational flexibility and a lower cost position than ABM, but ABM benefits from a portfolio of diversified businesses.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Newcastle coal price in line with Fitch's price deck - 2021: USD81/tonne; 2022: USD70/tonne, 2023: USD68/tonne and 2024: USD66/tonne. ABM's coal prices are adjusted for calorific value;

- OB volume to increase by 23% to around 170mbcm in 2021 followed by average annual increase of 3% for the next three years;

- Coal mining sales volume to increase by 15% in 2021 and about 8% in 2022, and declining thereafter;

- Cumulative capex of around USD300 million in 2021-2024.

Key Recovery Rating Assumptions:

- The recovery analysis assumes that ABM would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated.

- We have assumed a 10% administrative claim.

- We have assumed ABM's 2021-2024 EBITDA (average of USD157million) after a haircut of 15% as its GC cash operating profit. The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation.

- An enterprise value/EBITDA multiple of 3.0x is applied to the GC EBITDA to calculate a post-reorganisation enterprise value. We use a multiple of 3.5x for BUMA; hence, a 3x multiple for ABM is justified.

- In the distribution waterfall, we have considered USD40 million of a short-term loan that was outstanding at end-2020.

The assumptions result in a recovery rate corresponding to a Recovery Rating of 'RR1'. However, ABM operates in Indonesia, which Fitch classifies as under Group D of jurisdictions; as a result, the Recovery Rating for ABM's senior debt is capped at 'RR4'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- An upgrade is unlikely over the short term, although a material improvement in ABM's coal contracting or mining business, while maintaining an appropriate financial profile in relation to the business profile, may lead to an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Deterioration in the company's core operating segment, including failure in retaining major customers;

- Cash flow generation falling short of Fitch's expectations, leading to a sustained deterioration in credit metrics, including FFO adjusted net leverage above 3.0x and FFO fixed-charge cover below 2.0x.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Refinancing Due in 2022: ABM had cash and cash equivalents of around USD117 million as of end-March 2021, against outstanding short-term debt of USD40 million. The company's short-term liquidity is supported by a total of USD95 million of undrawn amounts under its committed revolving facility and a working capital loan it entered during 1H21 with a 12-month maturity. ABM's proposed US dollar notes, if successful, will address its only material debt maturity, the outstanding amount on its USD350 million note in 2022, as we believe it will have insufficient internal cash flow to cover the repayment.

ABM's refinancing pressure has lessened after two local banks agreed to extend a long-term facility of up to USD200 million that can be utilised to refinance existing US dollar notes. However, the facility's finalisation is subject to certain conditions, including the issuance of new US dollar notes of at least USD200 million. The company says it has received a waiver for breaching a covenant on one of its working capital loans in FY20 and at end-March 2021.

ISSUER PROFILE

ABM is an Indonesian integrated company with businesses spanning coal mining, mining contracting, and logistics, engineering and fuel services. ABM is majority-owned and controlled by the Hamami family, with about 21% of its shares listed on the Jakarta Stock Exchange.

CRITERIA VARIATION

We applied a variation under our Corporate Rating Criteria by using multiple-based lease-adjusted credit metrics to assess ABM's rating, instead of unadjusted ratios as defined in the criteria, to better reflect ABM's financial profile, given its strategy of using operating leases for its core assets in its mining contracting business.

DATE OF RELEVANT COMMITTEE

05 May 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)