Moody's: ARMS shareholders' vote to maintain existing board is positive for Berau restructuring

(Singapore, February 05, 2015) -- Moody's Investors Service says that the vote of shareholders of Asia Resources Minerals Plc (ARMS, unrated), the 85%-owner of Berau Coal Energy (P.T) (BCE, Caa1, review for downgrade), to maintain its existing board removes the uncertainty and overhang that has complicated plans to restructure the $450 million senior secured notes due 8 July 2015 issued by Berau Capital Resources Pte. Ltd. and guaranteed by BCE.

At the general shareholders' meeting held on 4 February 2015, ARMS shareholders voted against Borneo Bumi Energi and Metal Pte Ltd's (Borneo, unrated) proposal to remove three independent directors and replace them with its own nominees. Samin Tan-controlled Borneo controls 23.8% of ARMS through its affiliate.

"The resolution of ARMS' latest shareholder disputes is credit positive for BCE as it eliminates uncertainty at the board level given earlier concerns that a Borneo-controlled board may not act in the best interest of BCE stakeholders. It will also improve investors' confidence, thereby creating a more conducive environment for BCE to execute its proposed restructuring plan, which includes the extension of its 2015 notes," says Brian Grieser, a Moody's Vice President and Senior Analyst.

"Moreover, we believe an independent ARMS board is critical in implementing best practice corporate governance standards, controls and accountability at BCE given the company's weak track record," adds Grieser, who is also lead analyst for BCE.

An independent review in 2013 revealed accounting irregularities, weaknesses in accounting practices, and $201 million of expenses with no clear business purpose. As a result of this review and a recent arbitration decision in Singapore, the former president director was ordered to restore $173 million to BCE. BCE's ability to recover these funds remains uncertain at this time.

On 20 January 2015, BCE announced a proposal to extend the maturity of its July 2015 notes to February 2017 and repay 5% of the notes at par. Moody's had commented that if successful, the transaction will be viewed as a distressed exchange under Moody's definition of default as it will have the effect of allowing BCE to avoid a payment default at the original scheduled maturity.

BCE's ratings remain on review for downgrade. Moody's review will focus on the final terms of the company's refinancing plans and its impact on BCE's prospective capital structure.

At conclusion of the review, ratings could be downgraded if any of the following were to occur: 1) terms of BCE's proposal changes such that an extension to the 2015 bonds results in a reduction in the par value of the bonds, a lower interest rate or the bondholders are forced to accept PIK interest over the life of the extended bond; 2) BCE's restructuring impacts the $500 million notes due 2017, whose timely repayment is increasingly at risk or 3) the proposal is rejected by bondholders and BCE misses a principal or interest payment.

The successful extension of the notes at current proposed terms, while viewed as a distressed exchange, would likely result in post-transaction ratings being affirmed at Caa1 with a stable outlook.

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 2.6 billion tons, with probable and proven reserves estimated at 512 million tons (mt). (ends)