Moody's: Berau's proposed maturity extension of 2015 notes likely a distressed exchange

(Singapore, January 23, 2015)-- Moody's Investors Service commented that Berau Coal Energy Tbk (P.T.)'s (BCE) proposal to extend its Senior Secured $450 million notes due July 2015 (Caa1) to February 2017 is consistent with expectations that led to the recent downgrade of BCE's ratings to Caa1 from B3. The ratings are on review for possible downgrade. 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.

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. The proposed restructuring will maintain the existing 12.5% interest rate, while introducing a paid-in-kind (PIK) feature that could allow the company to defer up to 5.25% of the interest, amongst other changes. The restructured 2015 notes would include a provision allowing BCE to extend the restructured notes to 2020, if it is successful in extending the 2017 notes. BCE has not indicated its plans with regards to the $500 million notes due 2017 (Caa1) at this time.

"The successful completion of a notes extension will address BCE's near term liquidity pressure, however it will create a substantial maturity wall in February 2017 when both bonds would come due" says Brian Grieser, a Moody's Vice President and Senior Analyst.

"While a roughly 2-year window represents progress for BCE in its refinancing efforts, a weak coal price environment is expected to exert pressure on the company's operating performance and liquidity profile making a second, larger refinancing in 2017 equally as challenging as its ongoing efforts" added Grieser, who is the lead analyst on BCE.

As such, we expect BCE to engage 2017 noteholders over the next year in an effort to extend the maturity of those bonds since it is unlikely that BCE would be in a position to repay the notes in 2017.

The company has also indicated plans for a potential equity injection, however it is unlikely to happen before the company addresses its 2015 maturity and the size of any transaction is currently unknown. If successful, it would ease liquidity pressure and would likely be supportive of the company's efforts to restructure the 2017 notes.

BCE's ratings remain on review for possible downgrade. Moody's review will largely focus on two factors. First is the outcome of the 4 February 2015 General Meeting at ARMS, which has been called by Borneo Bumi Energi and Metal Pte Ltd (unrated), a Samin Tan-controlled vehicle that controls 23.8% of ARMS, to vote on resolutions to remove three independent directors and replace them with their own nominees. Second, the review will evaluate 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) the outcome of ARMS' general shareholders' meeting results in an board that does not contain a majority of independent directors; 2) 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; 3) BCE's restructuring impacts the $500 million notes due 2017, whose timely repayment is increasingly at risk or 4) 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)