Moody's assigns B2 rating to Medco's proposed bond

(Singapore, April 23, 2019) -- Moody's Investors Service ("Moody's") has assigned a B2 rating to the proposed USD-denominated backed senior unsecured notes to be issued by Medco Oak Tree Pte. Ltd., a wholly-owned subsidiary of Medco Energi Internasional Tbk (P.T.) (Medco, B2 positive).

The proposed notes will be irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries on completion of the company's acquisition of London-listed Ophir Energy plc. (Ophir).

The outlook is positive.

The bond proceeds will be initially kept in an escrow account and will ultimately be used to finance the GBP408.4 million ($533 million) acquisition of Ophir (if completed), repay existing debt and for generate corporate purposes. If the acquisition is not completed by 4 July 2019, the proceeds in the escrow account along with early redemption premium of 1% and accrued interest, which together will be pre-funded by Medco, will be used to redeem the bond in full.

RATINGS RATIONALE

"Medco's B2 rating reflects its modest scale of operations, moderate degree of cash flow visibility from fixed-price natural gas sales and our expectations that its credit metrics will continue to improve over the next few quarters," says Rachel Chua, a Moody's Assistant Vice President and Analyst.

"The improvement in Medco's credit metrics will be supported by its sale of non-core assets in line with its deleveraging plan and the strong operating cash flow generation from Ophir's portfolio once the transaction is complete," adds Chua, who is Moody's Lead Analyst for Medco.

Moody's affirmed Medco's B2 ratings and positive outlook on 1 February 2019 on the back of the proposed acquisition of Ophir and continued improvement in financial performance. Since then, the company has obtained approval from Ophir's shareholders for the transaction.

Moody's expects Medco's post-acquisition adjusted net debt/ EBITDA (net of cash in escrow earmarked for debt repayment) will improve to around 3.5x over the next two years, from around 4.2x in 2018. Over the same period, its EBITDA/interest cover will be around 3.5x-4.0x and RCF/adjusted net debt will be about 14%.

At the same time, the B2 rating remains constrained by Medco's exposure to the cyclicality of commodity prices, acquisitive growth appetite, and the execution risk associated with its investment plan of around $300 million per annum over the next two years.

The positive outlook on Medco's rating incorporates Moody's expectation that Medco's credit metrics will continue to improve in 2019-20, supported by stable cash flow generation from its existing portfolio and planned sale of non-core assets.

Medco's CFR could be upgraded after the completion of the proposed acquisition and the debt-reduction plan, if its credit metrics continue to improve such that adjusted net debt/EBITDA remains below 4.5x, RCF/adjusted net debt increases to 10%-15%, and EBITDA/interest expense increases above 4.0x.

In addition, a ratings upgrade would also require the company to maintain strong liquidity with cash and cash equivalents covering at least the amount of debt maturing over the next 12 months.

Given the positive outlook, a rating downgrade is unlikely.

Nonetheless, the outlook could be revised to stable if (1) Medco fails to execute its deleveraging plan, or if there are material delays in implementation; or (2) the proposed acquisition results in a higher increase in borrowings than Moody's current expectations or if Medco makes further material debt-funded acquisitions; or (3) Medco provides funding support to its mining or power businesses.

Specific credit metrics that Moody's would consider to revise the outlook to stable include adjusted net debt/EBITDA between 4.5x-5.0x, EBITDA/interest expense below 3.5x-4.0x or a weakening of its RCF/adjusted net debt from current levels.

The principal methodology used in this rating was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) is a Southeast Asian integrated energy and natural resources company listed in Indonesia with three key business segments, oil and gas, power and mining.

Medco reported proved developed reserves of 190 million barrels of oil equivalent (mmboe) as of 31 December 2018, and oil and gas production volumes of 78 thousand barrels of oil equivalents per day (kboepd) (excluding service contracts) in 2018. (ends)