Moody's assigns (P)B1 to Berau Coal's proposed notes
Friday, July 25 2014 - 12:36 PM WIB
The notes being issued by Berau Capital Resources II Pte. Ltd., a wholly-owned subsidiary of Berau Coal Energy Tbk (BCE, B1 negative), will be unconditionally guaranteed by BCE and certain subsidiaries.
Proceeds from the proposed notes will be used to refinance Berau Capital Resources Pte. Ltd.'s USD450 million 12.5% senior secured notes maturing in July 2015.
BCE's B1 corporate family rating was affirmed on 30 June 2014. The rating outlook is negative.
Moody's will remove the provisional status of the notes after reviewing the final terms and conditions of the proposed notes and consent solicitation on the exsting 2015 and 2017 notes.
"This proposed refinancing of BCE's maturing 2015 notes is in line with our expectations underpinning the affirmation of BCE's B1 CFR last month. The successful execution of the refinancing will sustain BCE's liquidity profile by extending its maturity profile such that its next material maturity is in 2017," says Brian Grieser, a Moody's Vice President and Senior Analyst.
BCE's B1 ratings and negative outlook reflect the continued pressure on its credit metrics in a challenging operating environment where thermal coal prices have been persistently weak and also takes into account Moody's expectation that coal prices will remain under pressure over the next 12 months.
"The rating also accommodates our expectation that low coal prices will drive BCE's financial leverage higher in 2014, towards 4.5x from 3.8x in March 2014. We expect management to continue implementing cost reduction measures and preserve cash in 2014-2015," adds Grieser, who is also Lead Analyst for BCE.
The notes are expected to rank equally and share the same collateral as the existing $500 million notes due 2017 (B1) and be governed by the existing cash and account management agreement (CAMA).
The ratings are supported by (1) BCE's majority ownership of Berau, one of the world's lowest-cost producers of thermal coal with a a history of consistent production growth; (2) the quality and stability of BCE's customer base of large utility companies; and (3) its good liquidity with substantial cash holding.
At the same time, BCE's strengths are balanced by its lack of product and concession diversification, exposure to commodity cycles, customer concentration risk and the uncertain regulatory environment in Indonesia.
A rating downgrade would likely occur if 1) the proposed refinancing is unsuccessful or delayed 2) Coal prices fail to stabilize and thus fall short of our $75-80 per ton target in the next twelve months; 3) BCE undertakes large expansionary capex projects or makes any large debt-funded acquisitions such that there is a material decline in BCE's cash balances.
Specific indicators Moody's would look for include adjusted debt/EBITDA exceeding 4.0-4.5x while net debt/EBITDA exceeds 3.0x-3.5x.
Other negative rating triggers include: 1) any adverse decisions regarding the off-setting of payments for VAT; or 2) any change in laws and regulations, particularly in relation to mining concessions that would adversely affect BCE's business.
Upward rating momentum is limited given the negative outlook and our view that deleveraging will be challenging in the current environment for coal prices. Nonetheless, the rating outlook may be changed to stable if BCE improves its financial leverage such that its adjusted debt/EBITDA falls below 3.5x and EBIT/interest exceeds 3.5x. Any positive action would require BCE to maintain the current strength of its liquidity profile in concert with an improvement in realized coal prices.
The principal methodology used in this rating was the Global Mining Industry published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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 2.2 billion tons, with probable and proven reserves estimated at 509 million tons (mt). (ends)