Moody's affirms BUMA's Ba3 CFR, downgrades notes rating to B1; outlook remains stable

(Singapore, March 25, 20240 -- Moody's Ratings (Moody's) has affirmed Bukit Makmur Mandiri Utama (P.T.)'s (BUMA) Ba3 corporate family rating (CFR).

At the same time, Moody's has downgraded the rating of BUMA's senior secured notes to B1 from Ba3 and maintained the stable outlook.

"The affirmation of BUMA's CFR reflects the company's position as Indonesia's second-largest coal mining services contractor by overburden volume, with increased overburden removal volumes in Australia; and its track record of maintaining conservative financial policies with positive free cash flow generation," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

"At the same time, the downgrade of the US dollar notes to B1 reflects their subordination relative to the secured bank debt in BUMA's capital structure," adds Hasnain, who is also Moody's lead analyst for BUMA.

RATINGS RATIONALE

On 18 March, BUMA announced via the results of its tender offer that it will redeem $153 million of its $366 million notes due February 2026 at par value. The notes, which are primarily being funded with a $750 million secured loan, will help the company proactively reduce its debt maturity wall in 2026.

The repayment of BUMA's tendered notes, along with the repayment of a $287 million loan in March 2024, is primarily being funded through a 5.75-year secured loan from Bank Negara Indonesia (Persero) Tbk (P.T.) (BNI, Baa2 stable, baa3) and Bank Mandiri (Persero) Tbk (P.T.) (Baa2 stable, baa2). The new loan reflects BUMA's continued access to funding despite operating in the coal mining sector, which has faced reduced funding access in recent years, particularly from foreign banks and the US dollar bond market.

BUMA has further improved its scale and geographic diversity in 2023, with a 14% annual increase in overburden removal volumes, driven by existing customers in Indonesia and Australia, and new contracts with Australian metallurgical coal miners. As a result, the company's reported EBITDA increased 13% in 2023. At the same time, BUMA has reduced its concentration risk from its largest customer Berau Coal (P.T.), which generated 25% of its revenue last year, down from 45% in 2021.

While Moody's expects BUMA's earnings to decline slightly in 2024 amid a small decrease in overburden removal volumes from customers amid lower coal prices, its leverage, as measured by adjusted debt/EBITDA, will remain healthy at around 2.7x over the next 12-18 months.

At the same time, BUMA's Ba3 CFR is constrained by its large customer contract maturities in 2025. While Moody's expects BUMA to proactively seek to extend existing customer contracts or sign new contracts, an inability to do so could result in a sizeable decrease in BUMA's overburden removal volume by 2025-26, thereby weakening its earnings and cash flow generation.

BUMA will maintain good liquidity with sufficient internal cash sources to meet its cash needs through June 2025. Moody's also estimates BUMA will have around $220 million undrawn under its new secured bank loan from BNI and Bank Mandiri following its recent loan repayment and notes tender, which the company can use for capital spending and new investments through December 2025. BUMA can also request lenders to use these funds to repay debt, which will help address the maturity of its residual $213 million notes due February 2026.

BUMA's outstanding notes are rated one notch below the CFR because, following the company's recent refinancing, the notes will make up only around 30% of its total debt (excluding leases), down from around 53% as of 30 September 2023. Residual noteholders will have to contend with secured bank debt, which has a priority claim and ranks ahead of the notes. Additionally, residual noteholders will no longer benefit from certain covenants and other protections under the notes' indenture as part of a successful consent solicitation that BUMA undertook concurrent to its tender offer.

The outlook is stable, reflecting Moody's expectation that BUMA will maintain stable credit metrics with no significant decline in overburden removal volumes, good liquidity, and a prudent approach to new investments and shareholder returns.

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

Moody's could upgrade the ratings if BUMA (1) continues to grow its scale and increase commodity diversification without weakening its credit metrics or materially increasing execution risk; (2) does not pursue more aggressive financial policies regarding growth and shareholder returns; and (3) maintains good liquidity while continuing to proactively refinance or repay its large debt maturities well ahead of the scheduled maturity.

Specific indicators that Moody's would consider for an upgrade include adjusted debt/EBITDA staying below 2.5x, and EBITDA/interest rising above 5.0x, both on a sustained basis.

Moody's could downgrade the ratings if (1) the company's expiring contracts, particularly those expiring in 2025, are not renewed or replaced with new contracts on similar or enhanced terms; (2) its liquidity weakens such that its cash sources are insufficient to meet its cash needs over the next 12-18 months; (3) its underlying financial policies change materially; (4) its earnings or profitability declines; or (5) payments from its largest customer, Berau Coal, are delayed, such that the average period for payment collection exceeds 65 days.

Credit metrics indicative of a downgrade include adjusted debt/EBITDA staying above 3.5x or EBITDA/interest expense staying below 4.0x, both on a sustained basis.

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Established in 1998, Bukit Makmur Mandiri Utama (P.T.) (BUMA) is a mining services contractor in Indonesia and Australia that provides open-cut mining services to thermal and metallurgical coal producers. BUMA is 100% owned (less one share) by PT Delta Dunia Makmur Tbk, an investment holding company listed on the Indonesia Stock Exchange. (ends)