Moody's assigns (P)B1 to Indika's proposed USD senior notes
Thursday, January 10 2013 - 12:24 AM WIB
The ratings outlook is stable.
At the same time, Moody's has also assigned a provisional (P)B1 rating with a stable outlook to the proposed 10-year USD senior notes to be issued by Indika's wholly owned subsidiary, Indo Energy Finance II B.V.
The notes will be unconditionally guaranteed by Indika as well as by its wholly owned subsidiaries, PT Indika Inti Corpindo (unrated) and the Tripatra Entities (unrated).
Moody's will remove the provisional rating status of the senior notes upon completion of the issuance and satisfactory review of the final documentation.
"The affirmation of Indika's ratings is based on Moody's expectation that the company's credit profile will stay within the parameters of its B1 rating, because of its plan to substantially reduce capex in 2013 and 2014 to preserve capital and liquidity, during the current down-cycle in coal prices," says Simon Wong, a Moody's Vice President and Senior Analyst.
"Furthermore, Indika's debt maturity profile is expected to improve upon the successful issuance of the proposed 10-year, USD senior notes, as the proceeds will be largely used to refinance its debt," adds Wong, also the Lead Analyst for Indika.
In addition, the terms of the proposed notes largely mirror the terms of the company's senior notes -- also rated B1 --- due in 2018.
While the proposed issuance will improve Indika's debt maturity profile, it will reduce its interest coverage ratio to around 1.8x-2.4x in 2013-14, from 2.5x in 2012, due to the higher level of outstanding debt post bond issuance, and the lower expected dividends from its key affiliate, PT Kideco Jaya Agung (unrated).
Moody's believes that Kideco's dividend payout to Indika could fall by more than 50% in FY2014 from FY2012 if coal prices remain at $90-$95 per ton for the next two years. The dividends provide crucial support to Indika's debt-servicing ability and the company's rating was largely predicated on the receipt of Kideco's recurring and stable dividends.
Nonetheless, Moody's has affirmed Indika's B1 ratings because of the company's improved liquidity and debt maturity profile upon the successful issuance of the proposed senior notes.
"Moreover, Indika has diversified its sources of operating cash flow to reduce its reliance on dividends from Kideco in the medium-to long-term, through its acquisitions of subsidiaries over the past two years. However, challenges remain, as these subsidiaries ---- Petrosea Tbk PT (unrated), PT Mitrabahtera Segara Sejati Tbk (MBSS, unrated) and PT Multi Tambangjaya Utama (MTU, unrated) -- are tied to the current downturn in the coal industry," says Wong.
Petrosea, MBSS and Tripatra have significant contractual backlogs, underpinning the prospects for healthy cash flow generation.
However, Petrosea could see some of its contracted volumes for 2013 and 2014 deferred to the future. This situation may be partly mitigated by the redeployment of some of its mining equipment to MTU, on the expectation that MTU goes ahead with its planned increase in production levels.
"Indika's significant cash on hand of $338 million as of 30 September 2012 and well-spread-out debt maturity profile also mitigate any liquidity concerns over the near-to medium-term," says Wong.
The stable outlook reflects the expectation that Indika will execute its business strategy as planned and maintain its competitiveness in the next 12 to 18 months.
Upward ratings pressure is limited in the near-to medium-term as deleveraging will be challenging in the current environment for coal prices. However, upward pressure could develop over time if 1) Indika increases its stake in Kideco to more than 50%; or 2) Indika improves its financial leverage, such that its total debt/EBITDA (including dividends from associates) falls below 2.5x, and EBIT/interest exceeds 3.5x.
Negative ratings pressure could emerge if 1) Indika receives significantly less dividend income from Kideco; 2) Tripatra, Petrosea, and MBSS fail to win tenders and contracts as forecast; 3) the relationship between Indika and its principal South Korean partner, Samtan Co Ltd (unrated) deteriorates; 4) there is evidence of a cash leakage; and 5) Tripatra or Kideco lose orders because of political or economic instability in Indonesia.
Specific indicators Moody's would look for include total debt/EBITDA (including dividends from associates) above 4.0x and EBIT/interest falling below 2.0x-2.5x.
PT Indika Energy Tbk's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside PT Indika Energy Tbk's core industry and believes PT Indika Energy Tbk's ratings are comparable to those of other issuers with similar credit risk.
PT Indika Energy Tbk is a listed integrated energy group based in Indonesia. Its principal investment is a 46% stake in PT Kideco Jaya Agung which is Indonesia's third-largest domestic coal producer by tonnage. In addition, Indika is involved in the engineering, procurement and construction (EPC) and operating and maintenance (O&M) businesses through its wholly owned subsidiary, Tripatra. In May 2012, Indika acquired an 85% stake in PT Multi Tambang Jaya Utama, a thermal and coking coal produer based in Central Kalimantan. In March 2012, Indika acquired 60% of a greenfield coal asset, PT Mitra Energi Agung located in East Kalimantan. Indika also acquired a 51% stake in PT Mitrabahtera Segara Sejati Tbk, an Indonesian coal transport and logistics services company, in April 2011. (ends)