Moody's affirms Bayan's Ba3 ratings; revises outlook to positive

(Singapore, May 20, 2021) -- Moody's Investors Service has affirmed Bayan Resources Tbk (P.T.)'s Ba3 corporate family rating (CFR) and the Ba3 rating on its senior unsecured notes. At the same time, Moody's has revised the outlook to positive from stable.

"The revision in outlook to positive reflects Bayan's very low leverage following its large notes buy back with cash and our expectation that the company will maintain strong credit metrics with minimal reliance on incremental debt and very good liquidity over the next 12-18 months," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"Bayan's improving credit profile is supported by its increasing thermal coal volumes following the increase in production at its Tabang mines in recent years; the long reserve life of its mines; and the company's solid profitability," adds Hasnain, who is also Moody's lead analyst for Bayan.

RATINGS RATIONALE

The company has also established a track record of debt reduction, using free cash flow to proactively repay debt ahead of schedule in recent years. In May 2021, it upsized its tender offer to redeem $251 million (up from the initial $220 million) of its $400 million US dollar notes with cash on hand, a credit positive.

Pro forma for this transaction, Moody's estimates Bayan's leverage -- as measured by adjusted debt/EBITDA -- will decline further to 0.3x from 0.8x as of March 2021. Moody's expects the company to maintain a very low leverage of below 0.5x over the next 12-18 months, based on a medium-term price assumption for Newcastle thermal coal of $65-$75 per ton.

Moody's also expects Bayan will have minimal reliance on incremental debt funding over the next few years, as the company's planned capital spending to increase production capacity and infrastructure will primarily be funded from internal cash flow.

Moody's also expects Bayan's construction of a 100-kilometer haul road connecting its Tabang mines to the Mahakam River along with a new barge loading facility, scheduled for completion in 2022, will help increase its production capacity to around 50 million tons in the next 3-4 years from around 33 million tons currently, and reduce the risk of weather-related operational disruptions. Mahakam is a larger river that is less exposed to water level fluctuations than Bayan's current principal waterways to transport coal.

Concurrent with its tender offer for its US dollar notes, Bayan obtained approval from noteholders to increase its dividend payment capacity under its bond indenture by $125 million. Still, despite the increased flexibility to pay higher dividends amid stronger cash flow generation, Moody's expects the company to maintain its shareholder returns over the next few years in line with its publicly stated dividend payout policy of up to 60% of the previous year's net income.

In addition, Moody's expects Bayan's liquidity to remain very good over the next 12-18 months, with cash on hand and projected operating cash flow sufficient to fund its proposed capital spending, notes buyback and dividends. The company also has around $274 million undrawn under multi-year committed working capital facilities with four banks that help supplement its liquidity.

The ability to draw down on these working capital facilities provides Bayan flexibility in the event of an adverse court ruling around its ongoing litigation with a former joint venture partner, which had claimed $153 million plus interest and costs. That said, Bayan has yet to record any provisions against this case. According to the company, a final ruling on this case is likely in 2021.

Thus, while Bayan's credit profile is constrained by its single-commodity exposure to thermal coal in Indonesia, its low-cost mining operations provide a considerable buffer against coal price downturns. That in part reflect the company's Tabang mines, which contribute around 85% of its coal production, and are among the lowest-cost energy-adjusted global coal producers with a very low stripping ratio of around 2.7x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The positive outlook reflects Moody's expectation that Bayan will generate strong earnings and cash flow, with a minimal reliance on incremental debt while maintaining very good liquidity over the next 12-18 months.

Moody's could upgrade the ratings over the next 12-18 months if Bayan continues to demonstrate conservative financial policies with strong credit metrics and maintaining enough cash to redeem the remainder of its US dollar bond due in January 2023.

Moody's could downgrade the rating if (1) Bayan experiences a material disruption in its operations; (2) industry fundamentals deteriorate, leading to a decline in earnings; or (3) the company's underlying financial or operational strategy changes materially, including higher-than-expected capital spending, material debt-funded acquisitions or a more aggressive dividend payment policy.

Specific financial indicators for a downgrade include adjusted debt/EBITDA approaching 3.5x or adjusted EBIT/interest expense trending down to 2.0x.

The methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Bayan, which was listed on the Indonesian Stock Exchange in 2008, is engaged in surface open cut mining of coal mines primarily in East and South Kalimantan.

Bayan's founder, Dato' Low Tuck Kwong, is the largest shareholder with a 54.7% stake. Korea Electric Power Corporation owns 20% through its subsidiaries, PT Sumber Suradaya Prima owns 10%, Bayan's management and founders hold an 11.8% stake, and the balance is publicly owned.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.  (ends)