Moody's affirms Berau Coal's B1 rating; outlook remains negative

(Singapore, June 30, 2014) -- Moody's Investors Service has affirmed the B1 corporate family rating of PT Berau Coal Energy Tbk (BCE) as well as the B1 senior secured ratings on the bonds issued by BCE and Berau Capital Resources Pte Ltd, which are guaranteed by BCE. The rating outlook remains negative.

"The negative outlook reflects the continued pressure on BCE's credit metrics as a result of the persistent weakness in thermal coal prices and our expectation that coal prices will remain under pressure over the next 12 months," says Brian Grieser, a Moody's Vice President and Senior Analyst.

Driven by the global oversupply situation, the Newcastle thermal coal price index, a benchmark for Asia, has fallen to $72 per ton in 2014 from an average of $84 per ton in 2013.

Moody's has revised its Newcastle coal prices to average between $75-80 per ton in 2014 from $80-85 back in December last year. Moody's does not anticipate a meaningful rebound in prices in 2015 reflecting increasing production by Indonesian and Australian thermal coal producers.

"We estimate that the low coal prices will drive BCE's financial leverage towards 4.5x in 2014 from 3.8x in March 2014, which is considered high for its B1 rating," adds Grieser, who is also Lead Analyst for BCE.

"We expect management to continue implementing cost reduction measures and preserve cash at the company in 2014-15. Given the pressure on BCE's credit quality, there is limited headroom at its current rating level to accommodate any further deterioration of its credit metrics and/or liquidity position," says Grieser.

BCE faces an upcoming maturity in July 2015 when its $450 million senior secured notes come due.

"The B1 rating also assumes that BCE will refinance the maturing notes before the end of July 2014. The inability to execute a refinancing in this timeframe would materially weaken its liquidity profile and would likely result in a ratings downgrade," says Grieser.

BCE's rating is supported by its good liquidity position which is key in providing financial flexibility during a period when depressed coal prices are pressuring margins and cash flows. It had a healthy cash balance of $373 million as of 31 March 2014.

At the same time, Moody's expects corporate governance and accountability at BCE to improve following the recently-completed separation between BCE's parent, Asia Resource Minerals plc (ARM, unrated) and the Bakrie Group (unrated) since no single shareholder will have a controlling interest in ARM.

We have revised our downgrade triggers to reflect our current view on BCE's credit profile. A rating downgrade would occur if 1) BCE is unable to refinance its $450 million senior secured notes before the end of July 2014; 2) Coal prices fail to stabilize and thus fall short of our $75-80 per ton target in the next twelve months; 3) BCE undertakes large expansionary capex projects or makes any large debt-funded acquisitions such that there is a material decline in BCE's cash balances.

Specific indicators Moody's would look for include adjusted debt/EBITDA exceeding 4.0-4.5x while net debt/EBITDA exceeds 3.0x-3.5x.

Other negative rating triggers include: 1) any adverse decisions regarding the off-setting of payments for VAT; or 2) any change in laws and regulations, particularly in relation to mining concessions that would adversely affect BCE's business.

Upward rating pressure is limited given the negative outlook and our view that deleveraging will be challenging in the current environment for coal prices. Nonetheless, the rating outlook may be changed to stable if BCE improves its financial leverage such that its adjusted debt/EBITDA falls below 3.5x and EBIT/interest exceeds 3.5x. Any positive action would require BCE to maintain the current strength of its liquidity profile in concert with an improvement in realized coal prices.

The principal methodology used in this rating was the Global Mining Industry published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

BCE is an investment holding company listed on the Indonesian Stock Exchange. It has a 90% interest in PT Berau Coal (unrated), Indonesia's fifth-largest producer and exporter of thermal coal. Berau operates three active mines -- Lati, Sambarata and Binungan -- at a single site in East Kalimantan. It has estimated resources of about 2.2 billion tons, with probable and proven reserves estimated at 509 million tons (mt). (ends)