Fitch downgrades Indika Energy to 'CCC'
Thursday, June 2 2016 - 11:20 AM WIB
The downgrade reflects Indika's weakened cash generation from expected lower dividend receipts, higher reliance on short-term debt facilities, our expectation of negative cash flow generation at Indika (after debt servicing costs) beyond 2016 leading to lower cash reserves, and uncertainties relating to how the 2018 note will be redeemed.
Sustained Weak Coal Market: Weak demand from China and India continues to hobble the Asia-Pacific thermal coal market, with key benchmark prices across the region falling about 15% in the last year. Prices have started to stabilise in recent months, but we do not expect any meaningful recovery in coal prices in the medium term. Domestic demand for steam coal in Indonesia is rising as domestic production declines, but this is not sufficient to balance the seaborne coal market.
Dividends from Kideco to Fall: Indika continues to rely heavily on dividends from its 46%-held coal company PT Kideco Jaya Angung (Kideco) for cash generation. However, Kideco's net income is likely to fall substantially in 2016 and 2017 because of lower production (Fitch expects 33 million tonnes in 2016, down from 39 million tonnes in 2015) and a shift to production of coal with lower calorific value. As a result, Fitch expects Kideco's dividend payment to Indika to fall to less than USD40m a year, from USD60m in 2016 and USD65m in 2015.
Kideco, however, remains profitable, with relatively high production flexibility and capacity (requiring little capex), generally low cash operating costs and little debt. We expect Kideco to be able to maintain a low strip ratio and to be able to further trim costs in 2016, especially on contractor payments. However, rising oil prices amid flat coal prices could put pressure on its margins over time.
Subsidiaries' Cash Generation to Worsen: Indika's dependence on Kideco has increased because the weak coal market has impaired the trading performance and cash generation of its other subsidiaries, especially 70%-owned PT Petrosea Tbk (Petrosea, a mining contractor) and 51%-owned PT Mitrabahtera Segara Sejati Tbk (MBSS, coal barging and handling). We now expect no dividend contribution from MBSS and Petrosea in the next two to three years. Indika received about USD19m of dividends in 2015 from MBSS, Petrosea and PT Cirebon Electric Power (20% interest).
The order book and revenue of fully owned Tripatra, an engineering, procurement and construction company, have also declined. However, we expect Tripatra's order book to benefit from an increase in infrastructure investments, including in oil & gas, in Indonesia.
Reliance on Short-Term Debt: With lower dividends likely from its investments, Indika will have to depend more heavily on short-term debt facilities. The company's short-term debt increased after it used its cash to repurchase about USD129m of the 2018 notes, which have total principal value of USD300m, for USD77m in November 2015. The company still has substantial cash balances. At end-March 2016, it had about USD215m of cash after receiving USD32m of the USD60m dividends due from Kideco in March, with total group consolidated cash balances at USD396m. This compared with about USD95m of short-term credit facilities (about USD93m of which has been drawn at end-March 2016), which require rolling over. The company is likely to repay some of these facilities and is in talks to or agreed to maintain the remaining. We believe the company will be able to roll over these facilities, although its interest charges on these facilities are likely to increase.
Deterioration in Liquidity Profile: Indika has taken further steps with the aim to reduce operating expenses at the company level by around USD10m a year, to around USD35m-40m a year. The company has several properties it can monetise. It recently sold a property in Singapore for around SGD30m (USD22m), but it is still not clear if the company will sell its properties in Jakarta. However, lower dividend receipts from 2017 and interest expenses at the Indika level of around USD45m a year would mean that the company will have to draw on its cash reserves, further reducing its financial flexibility and liquidity.
Looming Debt Maturity: Aside from its short-term debt facilities, the remaining USD171m of the 2018 notes fall due in May 2018. The next large debt maturity is for the USD500m notes due in Jan 2023. The company is weighing its options to address its debt structure, especially the repayment of the 2018 notes. Fitch is unlikely to treat another below-par debt repurchase or exchange as opportunistic given the weakened liquidity profile of the company. (ends)