Fitch Rates Indika's Proposed USD notes 'B+(EXP)'
Wednesday, September 27 2017 - 11:24 AM WIB
The Rating Watch Positive (RWP) on Indika's rating reflects Fitch's expectations of an improvement in Indika's credit profile after the proposed acquisition of an additional 45% stake in PT Kideco Jaya Agung (Kideco), Indika's key coal-mining asset. We believe that the acquisition will enhance Indika's control over Kideco's operational and financial strategy and increase its access to Kideco's cash, which will be credit-positive relative to the incremental debt to finance the acquisition.
We believe Indika's business profile and credit metrics will be comparable with other low 'BB' rated coal peers following the proposed share purchase; however, the lumpy debt maturities around 2022/2023 constrain the ratings. We are likely to upgrade Indika's ratings to 'B+' after it completes the proposed acquisition - including the proposed bond issuance to finance it.
Indika, along with some of its subsidiaries, will unconditionally and irrevocably guarantee the proposed senior unsecured notes. The notes will rank pari passu with other senior unsecured borrowings of Indika. The final ratings on the notes are contingent upon the receipt of documents conforming to information already received.
KEY RATING DRIVERS
Additional Stake Value Accretive: We expect Indika's proposed plan to acquire the additional Kideco stake to be value accretive, considering the proposed purchase consideration when weighed against the benefits of additional cash access and greater operational and financial control. The proposed transaction will result in an initial payout of around USD517.5 million and a deferred consideration of around USD160 million, on present-value basis. The deferred consideration is to be paid upon fulfilment of certain terms and conditions..
We expect Indika's incremental dividends on account of the additional stake in Kideco to be sufficient to repay more than half of additional debt after meeting funding costs on the additional debt over the next five years. We also believe that Indika will have greater control to influence the production plans and timing of dividends.
Consolidated Approach: Fitch expects to take a consolidated view of Indika including Kideco, with Kideco becoming a majority-owned subsidiary of Indika, in addition to analysing Indika's holding company cash flows on a standalone basis. The consolidated view reflects Indika's greater control over Kideco's operations and financial strategy. We believe Indika's cash flows and credit metrics will benefit from the favourable incremental dividends relative to the additional debt.
Metrics to Improve: We expect credit metrics to improve from financial year 2018 (FY18, to December 2018) following the completion of the share purchase. Consolidated EBITDAR fixed-charge cover should be around 4x from FY18, while consolidated net leverage (net adjusted debt/ EBITDAR) is likely to decline to around 2x in FY18 and remain around 1.5x-2x over the medium term. We also expect Indika's standalone (holding company on a standalone basis) EBITDA interest cover to improve and range between 1.7x-4x over the next five years, with average interest cover of 2x versus our previous expectations of around 1.3x.
Lumpy Debt Maturities Constrain Ratings: Indika has USD265 million notes maturing in 2022 and its USD500 million notes due in 2023. The proposed US dollar notes for funding the additional share purchase in Kideco are likely to further increase the debt maturities around this period. Most coal-mining and coal-related peers have more staggered debt maturities. Fitch believes that Indika has some flexibility to manage its debt maturity profile from call options on its existing US dollar notes, yet refinancing risk remains against the backdrop of rising global interest rates and coal-price volatilities, which constrain the ratings.
Cyclical Coal-Industry Exposure: Indika is vulnerable to the commodity cycle, as its earnings and cash flow are linked to the thermal coal industry. Thermal coal prices have come off their late-2016 peak, reflecting China's coal-price management policies. Fitch expects some production uptick in response to higher prices, which should lead to further price moderation over the medium term and is reflected in our price assumptions. Furthermore, we expect Asian thermal coal prices to be highly susceptible to import demand in the region, particularly Chinese demand and policies relating to the coal sector.
Kideco's Low-Cost Operations: Kideco's benefits from the low-cost structure of its key mines (first and second quartile) and high production flexibility and capacity, which requires little capex. It also benefits from the large reserves (proven reserves of around 422 million tonnes) and relatively favourable reserve life of its mines. The absence of any debt also supports its profitability and pre-dividend free cash generation. Kideco trimmed costs during 2016, but we expect rising oil prices to drive up costs marginally over the medium term. Notwithstanding this, Kideco retains its ability to generate stronger cash flow based on our coal-price assumptions.
Subsidiaries' Operations to Improve Gradually: We expect operations of 70%-owned PT Petrosea Tbk (a mining contractor) and 51%-owned PT Mitrabahtera Segara Sejati Tbk (MBSS, coal barging and handling) to improve gradually in 2017 and 2018, supported by higher commodity prices. We expect Petrosea and MBSS to turn around and generate net profit from 2017 and 2018, respectively, compared with their net losses in 2015 and 2016.
We believe these subsidiaries will be able to fund their own investment needs and will not require financial support from Indika. We expect order-book and revenues of fully owned Tripatra (an engineering, procurement and construction company) to benefit from a boost to infrastructure investments in Indonesia - including the oil & gas sector - over the medium term. Tripatra's revenues increased by 25% yoy during 1H17 to USD149 million.
DERIVATION SUMMARY
The RWP on Indika's ratings reflects Fitch's expectation of improvement in Indika's profile following the completion of the proposed agreement to purchase additional shares in Kideco - its key coal-mining asset. We expect Indika to benefit from incremental cash flows and greater operational control of Kideco when weighed against the proposed purchase consideration.
We expect Indika's post-acquisition business profile to be comparable with PT Bukit Makmur Mandiri Utama (BB-/Stable) and PT ABM Investama Tbk (BB-/Stable) given the low-cost position of Kideco - one of the top 3 coal producers in Indonesia - and partially integrated operations in to coal-mine contracting and transportation though its other subsidiaries. However, we expect Indika's financial profile to be weaker as its lumpy debt maturities can expose the company to refinancing risks over the medium term - resulting in its rating being one notch lower. Geo Energy Resources Limited's (B+/Stable) business profile is weaker, given its small scale of operations and limited reserves of its mines compared with Indika. However, its stronger financial profile than Indika's expected financial profile following the proposed share purchase transaction results in their ratings being similar.
Indika's current 'B-' ratings reflect the improved liquidity, which is supported by the successful refinancing of its 2018 debt maturities in April 2017 and improved cash flows from higher coal prices. Indika has better liquidity than MIE Holdings Corporation (CCC), which faces a significant challenge in refinancing its outstanding notes due February 2018 and April 2019, made more difficult by the company's depleted asset base relative to its high indebtedness. (ends)