Moody's affirms Indika's Ba3 ratings; revises outlook to stable from negative

(Singapore, October 21, 2021) -- Moody's Investors Service has affirmed the Ba3 corporate family rating (CFR) of Indika Energy Tbk (P.T.), the Ba3 ratings on the $575 million backed senior secured notes due 2024 issued by Indika Energy Capital III Pte. Ltd., and the $675 million backed senior secured notes due 2025 issued by Indika Energy Capital IV Pte. Ltd.

At the same time, Moody's has revised the outlook to stable from negative.

"The outlook revision to stable reflects our expectations that Indika's credit metrics will improve and remain within the parameters of its Ba3 ratings over the next 12-18 months, amid an increase in thermal coal prices from the low levels observed in 2020," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

"The affirmation of Indika's Ba3 ratings reflects the company's diversified operations, long operating track record, solid liquidity and continued adherence to prudent financial policies," adds Hasnain, who is also Moody's lead analyst for Indika.

RATINGS RATIONALE

Amid record high thermal coal prices, Moody's estimates Indika's adjusted leverage -- as measured by adjusted debt/EBITDA - will decline to around 2.3x in 2021 from around 7.3x in 2020, due to stronger earnings particularly at its 91%-owned coal mining subsidiary, Kideco Jaya Agung (P.T.). Kideco's cash profit per ton (net of royalties) has already jumped to around $14 in the six months ended June 2021 (1H 2021) from around $7.5 in 1H 2020.

While historical prices suggest the current high Newcastle thermal coal price of around $240 per ton is unlikely to be sustained for a prolonged period, based on Moody's medium-term price assumptions for Newcastle thermal coal of $75-$83 per ton, Indika's adjusted leverage of 3.0x-3.5x over the next two years will remain within the 4.0x ratings downgrade trigger at the Ba3 rating level.

Moody's expectations for Indika include its contract mining subsidiary Petrosea Tbk (P.T.) and engineering subsidiary Tripatra Multi Energi (P.T.), which contributed 14% and 7% of consolidated revenue in 1H 2021, executing new contracts with external customers over the next 12-18 months. Indika's scale and business diversity will weaken if these subsidiaries are unable to sign new contracts to replenish their declining order book.

Moody's also expects Indika to take a conservative approach toward new investments as the company diversifies its operations and reduces its earnings reliance on thermal coal.

As such, Moody's does not expect Indika to prioritize its stated target to generate 50% of its revenue from non-coal businesses by 2025 (14% in the first half of 2021) at the expense of weakening its credit profile. Indika's ability to reach this target will also depend on external factors, including the prevailing coal prices, which are outside the company's control.

As part of its diversification strategy, Indika announced in October 2021 that it had acquired the remaining 72% stake it did not own in Nusantara Resources Limited, which owns a greenfield gold mine in South Sulawesi, Indonesia, for $42.7 million. The project requires capital costs of at least $233 million and will likely start operations by end-2024.

Therefore, Indika's thermal coal operations at Kideco will likely continue to generate most of the company's earnings over the next few years and underpin Indika's Ba3 ratings. Kideco has a long track record of stable production and profitable operations, with large coal reserves.

Indika's Ba3 ratings also incorporate Moody's expectation that Kideco's coal contract of work (CCoW) mining license, which expires in March 2023, will be extended on broadly similar terms. Regulatory uncertainty around the extension of Kideco's mine license has decreased following PT Arutmin Indonesia's 10-year license extension in November 2020. Arutmin, which is owned by Bumi Resources Tbk (P.T.) (Caa1 negative), was one of the first large Indonesian coal miners to have its CCoW expire and will likely serve as a precedent for other CCoW license holders, including Kideco.

Indika will maintain very good liquidity, as its large consolidated cash balance and projected operating cash flows will be sufficient to meet its cash needs over the next 12-18 months. Moody's expects Indika to continue to proactively repay debt ahead of scheduled maturities, including its large $1.25 billion US dollar notes, which will mature during 2024-25.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Indika's ESG Credit Impact Score is highly negative (CIS-4). The score reflects Indika's very high exposure to environmental risks and high exposure to social risks stemming from its coal mining operations. The company's strategy to diversify its earnings away from coal could reduce some of these risks over time.

The company's exposure to environmental risk is very highly negative (E-5 issuer profile score), driven by very high carbon transition risks for thermal coal, Indika's key earnings driver. This risk could decline over the next 2-3 years if Indika grows its non-coal related businesses and reduces its earnings reliance on thermal coal.

Indika's exposure to social risk is highly negative (S-4 issuer profile score), driven primarily by the high exposure of its coal mining activities to human capital, health & safety, responsible production, and demographic and societal trend risks. To address these risks, Indika initiates sustainability initiatives under its health, safety and environment programs, and carries out corporate social responsibility activities via the Indika Foundation.

Indika's exposure to governance risk is moderately negative (G-3 issuer profile score), driven by challenges associated with its growth and diversification strategy, which will require incremental debt and entail execution risk. These risks are somewhat mitigated by Indika's track record of managing its operations through multiple commodity price cycles and its adherence to prudent financial policies, including the proactive refinancing of its debt maturities, modest shareholder returns, and maintaining its good liquidity with large cash balances, and its demonstrated access to capital markets.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Indika will maintain (1) profitable and cash-generative operations; (2) a conservative approach to investments and shareholder returns; and (3) strong liquidity and proactively refinance debt maturities.

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

An upgrade of the rating is unlikely over the next 12-18 months, given Indika's current scale and risks associated with its diversification strategy. Nonetheless, upward rating pressure could arise over time if Indika (1) increases its scale and diversifies its business while maintaining a strong credit profile; (2) extends the Kideco coal mining license beyond its 2025 bond maturity, with no material changes to the existing terms; and (3) maintains very good liquidity, while proactively refinancing or repaying its large debt maturities due in 2024-25 well ahead of the scheduled maturity.

Specific financial indicators Moody's would consider for an upgrade include adjusted debt/EBITDA below 2.5x and adjusted EBIT/interest above 3.0x, both for an extended period.

Moody's could downgrade the ratings if (1) Indika's credit metrics weaken; (2) Kideco fails to extend its CCoW mining license on substantially similar terms; or (3) Indika engages in aggressive shareholder distributions or investments, demonstrating a departure from its track record of preserving liquidity.

Specific financial indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 4.0x or adjusted EBIT/interest below 2.0x, both for an extended period.

The principal 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.

Indika Energy Tbk (P.T.) is an Indonesian integrated energy group listed on Indonesia's Stock Exchange, with a market capitalization of around IDR12 trillion ($850 million) as of 19 October 2021. Its principal investment is a 91% stake in Kideco Jaya Agung (P.T.), one of Indonesia's largest domestic coal producers. (ends)