Moody's affirms BUMA's Ba3 ratings; outlook remains negative

(Singapore, October 15, 2021) -- Moody's Investors Service has affirmed Bukit Makmur Mandiri Utama (P.T.)'s (BUMA) Ba3 corporate family rating (CFR) and the Ba3 rating on its senior secured notes.

The outlook remains negative.

"The negative outlook reflects the high execution risks associated with BUMA's growth and diversification strategy over the next 12 months, which entails large debt-funded capital spending," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

"However, successful execution of this strategy will support BUMA's Ba3 ratings by helping the company increase its scale, reduce its customer concentration risks and improve its credit metrics," adds Hasnain, also Moody's Lead Analyst for BUMA.

RATINGS RATIONALE

On 11 October 2021, BUMA announced that it has entered into a conditional agreement with Australian services contractor, Downer EDI Limited to acquire Downer's coal mining contractor business Open Cut Mining East ("Mining East") in Australia.

BUMA will acquire Mining East for around $110 million (subject to adjustments at transaction completion) through its newly incorporated Australian subsidiary, BUMA International Pty. Ltd., owned 90% by BUMA and 10% by AGDM Investments Pty Ltd. BUMA will fund the transaction, expected to close before the end of 2021, with proceeds from its $350 million loan from Bank Mandiri (Persero) Tbk (P.T.) signed in July 2021.

Moody's estimates that incremental earnings from the planned acquisition, along with higher overburden removal volumes from two key customers in Indonesia, will help reduce BUMA's adjusted debt/EBITDA to around 3.3x by the end of 2022 from around 4.5x as of 30 June 2021.

However, the incremental earnings are tied to high capital spending and investment requirements, which Moody's estimates will total around $500 million in 2021, and will primarily be debt-funded. Thus, the inability to execute on these growth plans will materially weaken BUMA's debt serviceability.

In addition, based on public disclosures of Downer, the current owner of Mining East, the four existing mining service contracts at Mining East will expire between 2022 and 2024. The inability to extend these contracts will weaken Mining East's earnings and negate the diversification benefits from the planned acquisition.

Assuming Mining East's maturing contracts are renewed, Moody's estimates the acquisition will contribute around 15% of BUMA's EBITDA in 2022. This will provide BUMA some geographic and product diversity, with earnings contribution from Australian metallurgical coal customers, in addition to BUMA's existing customers who are all Indonesian thermal coal miners.

Moody's also expects contracts signed this year with PT Indonesia Pratama, a subsidiary of Bayan Resources Tbk. (P.T.) (Ba2 stable) and with Adaro Indonesia (P.T.) (Ba1 stable), will help lower the customer concentration risk, as revenues from BUMA's largest customer Berau Coal (P.T.) will fall to around 30% in 2022, from around 48% for the six months ended June 2021.

Moreover, BUMA's Ba3 CFR is also premised on Moody's expectation that its current financial policies, which include prioritizing positive free cash flow generation for debt reduction and minimal shareholder returns, will remain unchanged.

Earlier this year, Souls Humanity Pte. Ltd. (SHPL), a private company controlled by Ashish Gupta and Ronald Sutardja, acquired Northstar Tambang Persada Ltd., an entity that owns 38% of PT Delta Dunia Makmur Tbk ("Delta"). Delta is an investment holding company that owns 100% (less one share) in BUMA.

As Delta's largest shareholder and thus, as BUMA's largest indirect shareholder, SHPL's track record of implementing financial policies and growth strategies at BUMA is relatively untested.

Given that funding for most of its planned capital spending and investments will be covered by a $350 million bank loan and around $120 million in finance leases, BUMA will have sufficient cash sources to meet its stated capital spending requirements and scheduled debt maturities over the next 12-15 months. Nonetheless, BUMA's cash sources will be insufficient to meet its cash needs if the company undertakes further investments or initiates shareholder returns.

OUTLOOK

The outlook is negative, reflecting the high execution risks associated with BUMA's growth and diversification strategy over the next 12 months, and uncertainties surrounding the company's future financial policies.

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

Moody's could downgrade the ratings if (1) BUMA's liquidity weakens such that cash sources are insufficient to meet cash needs over the next 12-15 months; (2) its underlying financial policies were to change materially; (3) it is unable to win new contracts, or if its expiring contracts are not renewed on similar or enhanced terms; (4) it experiences declining earnings or profitability; or (5) payments from its largest customer Berau Coal are delayed, such that the average days for payment collection exceed 65 days.

Credit metrics indicative of a downgrade include BUMA's adjusted debt/EBITDA staying above 3.5x, retained cash flow/net debt staying below 20%, or EBITA/interest expense staying below 2.0x, on a sustained basis.

An upgrade of BUMA's ratings is unlikely over the next 12-18 months, given the negative outlook. However, Moody's could revise the outlook to stable if (1) BUMA grows overburden removal volumes, without weakening its credit metrics or materially increasing execution risk, and (2) BUMA does not pursue more aggressive financial policies regarding growth and shareholder returns.

In addition to BUMA having sufficient cash sources to meet its cash needs over the next 12 months, specific indicators that Moody's would consider for a change in outlook to stable include BUMA's adjusted debt/EBITDA staying below 3.25x and retained cash flow/net debt staying above 25%, on a sustained basis.

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1998, Bukit Makmur Mandiri Utama (P.T.) (BUMA) is a coal mining services contractor in Indonesia, providing open-cut mining services to some of the country's largest 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, which, in turn, is 38% owned by Northstar Tambang Persada Ltd (NTP).

NTP is wholly-owned by Souls Humanity Pte. Ltd. a private company controlled by Ashish Gupta and Delta Dunia's President Director, Ronald Sutardja. (ends)