Moody's: Berau defaults on its senior secured notes due 8 July 2015
Thursday, July 9 2015 - 02:42 PM WIB
Prior to default, the Singapore High Court imposed a moratorium on the 2015 notes, giving the company until 4 January to negotiate with noteholders.
On 1 July, Asia Coal Energy Ventures Limited (ACE, unrated), funded by Indonesia-based Sinarmas Group (unrated), announced an unconditional cash offer to acquire 100% of the outstanding shares of BCE's 84.7% owner, Asia Resource Minerals (ARMS, unrated). The takeover is in the final stages of completion following acceptance from approximately 68.2% of ARMS' shareholders, including Nathaniel Rothschild's NR Holdings (unrated) which had proposed an initial competing equity offer for BCE.
ACE then announced terms of a proposed notes restructuring in its draft restructuring support agreement. Under the proposed transaction, BCE will pay a portion of the notes principal using $100 million of new equity proceeds raised at ARMS - and down-streamed to BCE as a shareholder loan - and $18.75 million of cash-on-hand. The unpaid portion of the $450 million notes due 8 July 2015 and $500 million notes due 13 March 2017, issued by BCE, would then be exchanged for new notes maturing on 31 July 2019 and 31 December 2020 respectively. The proposed restructuring also aims to reduce the coupon on the new notes, comprising both a cash and paid-in-kind component.
"Even with the moratorium in place, BCE is exposed to potential lender claims in Indonesia until it remedies its default with the expected note exchange detailed in the draft restructuring support agreement," says Brian Grieser, a Moody's Vice President and Senior Analyst.
"The proposed restructuring of the 2015 and 2017 notes, when completed, will be positive for BCE in that it lowers the cash coupon payment and significantly improves the company's maturity profile as its next material maturity will be pushed to 2019," adds Grieser, who is also Lead Analyst for BCE.
Despite the partial payment of the principal outstanding under the notes, BCE's leverage will likely remain between 5.0x-6.0x given the increase in its total debt following the planned shareholder loan from ARMS to fund the restructuring plan and continued earnings pressure driven by weak coal prices. We estimate BCE's adjusted debt-to-EBITDA was approximately 4.8x at 31 December 2014. Despite the weak coal environment, ARMS reported solid revenue and EBITDA performance for 2014 of roughly $1.4 billion and $206 million, respectively.
The negative outlook reflects the still to be concluded bond restructuring plan. Should the proposed terms be agreed to by noteholders, the ratings would likely be stabilized or potentially upgraded post-transaction, assuming no further deterioration on BCE's overall credit profile.
The negative outlook also reflects the lack of clarity around ACE's corporate strategy once the takeover is completed and its financial and corporate governance policies at BCE, which has been plagued by weak governance over the past few years.
Ratings are unlikely to be upgraded prior to successful completion of the restructuring. Upon completion of the change in ownership at ARMS and the notes restructuring, the ratings could be upgraded by one to two notches reflecting the improved debt maturity profile and reduced interest costs, BCE's operating performance and post restructuring financial and corporate governance policies.
The ratings could be downgraded if the company is unable to execute a restructuring in 2015 or if the terms of the proposed restructuring plan are changed such that recovery weakens for bondholders.
The principal methodology used in these ratings was Global Mining Industry published in August 2014. 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 2.6 billion tons, with probable and proven reserves estimated at 512 million tons. (ends)