Moody's confirms ABM Investama's B1 ratings; outlook stable

(Singapore, August 02, 2021) -- Moody's Investors Service has confirmed ABM Investama Tbk (P.T.)'s B1 corporate family rating (CFR), along with the B1 ratings on its senior unsecured notes due August 2022 and its senior unsecured notes due August 2026.

Moody's has also changed the outlook to stable from ratings under review.

Today's rating action concludes the review for downgrade, which was initiated on 17 June 2021.

"The confirmation reflects ABM's new notes issuance which, together with proceeds from its imminent senior loan facility, will alleviate refinancing risks associated with the notes that will come due on 1 August 2022," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"The B1 ratings and stable outlook reflect our expectation that ABM's earnings and cash flow at its coal mining and mining services subsidiaries will improve over the next 12 months, amid increased production volumes and higher coal prices," adds Hasnain, who is also Moody's lead analyst for ABM.

RATINGS RATIONALE

Pro forma for the proceeds from its new notes and senior loan facility, ABM's liquidity will improve as its cash sources will be sufficient to meet its cash needs over the next 12-15 months, including the repayment of its $350 million notes due in August 2022.

On 29 July 2021, ABM priced $200 million 9.5% senior notes due August 2026, the net proceeds from which will be used to fund its tender offer to partially redeem its senior notes due in August 2022.

The ability to raise $200 million in new notes was a key condition for ABM to sign a new $200 million senior loan facility, of which $150 million will be earmarked to refinance the outstanding principal under its senior notes due in August 2022.

ABM is in the process of entering into a definitive agreement for this loan facility with Bank Mandiri (Persero) Tbk (P.T.) (Baa2 stable) and Bank Negara Indonesia (Persero) Tbk (P.T.) (Baa2 stable), and expects to sign the facility within this month, ahead of the 15 September 2021 long-stop date. The B1 ratings and stable outlook are premised on ABM signing this facility on time without any adverse changes in the facility terms as outlined in the indicative term sheet.

ABM's B1 CFR reflects the company's integrated operations across the coal mining value chain, which provide cost synergies; reduced refinancing risk with no material near-term debt maturities once its August 2022 notes are redeemed in the coming months; and stronger credit metrics, with adjusted debt/EBTIDA improving to 2.0x-2.5x over the next 12-18 months from around 3.2x in 2020 amid higher coal prices and increased volumes at ABM's mining and mining services subsidiaries.

At the same time, ABM's B1 CFR is constrained by limited clarity around its acquisition strategy to improve its business profile amid dwindling reserves at its PT Tunas Inti Abadi (TIA) mine; the company's small scale; and its exposure to cyclical thermal coal prices.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

ABM's ESG Credit Impact Score is highly negative (CIS-4), reflecting the company's very high exposure to environmental risks and high exposure to social risks stemming from its operations within the thermal coal mining sector, and high exposure to governance risks stemming from its inability in recent years to effectively execute on its growth plan.

The company's exposure to environmental risk is very highly negative (E-5 issuer profile score), driven by very high carbon transition risks associated with thermal coal -- thermal coal mining and coal mining services will continue to generate most of ABM's revenue over the next few years. While coal demand in Asia remains stronger than in other regions, Asian coal miners are increasingly exposed to material credit implications, including reduced access to funding. In addition, policies favoring renewables, the declining cost of renewables and the development of disruptive technologies will increase the long-term risk for coal miners.

ABM's exposure to social risk is highly negative (S-4 issuer profile score), driven primarily by its coal mining operations' high exposure to human capital, health and safety, responsible production and demographic and societal trends. Although the company had on occasion received complaints around its coal mining operations related to environmental management in 2020, these have reportedly been resolved and have not materially impact its operations. ABM has also implemented processes to ensure occupational safety and conducts safety training and health checks for its employees. The company also engages with and supports the local communities where its mines are located.

ABM's exposure to governance risk is highly negative (G-4 issuer profile score), reflecting its inability thus far to effectively execute on its growth plans, and its increased reliance on debt-funded acquisitions to replace depleting coal reserves at a key mine.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that ABM will increase its earnings and operating cash flow, while maintaining sufficient internal cash sources to meet its cash needs over the next 12-18 months.

An upgrade is unlikely over the next 12 months, given the limited clarity on ABM's strategy to improve its scale and business profile amid dwindling coal reserves at a key mine. Nonetheless, Moody's could upgrade the ratings over time if ABM executes on this strategy while improving its credit metrics on a sustained basis.

Credit metrics indicative of a rating upgrade include adjusted debt/EBITDA below 3.0x, adjusted EBIT/interest above 2.5x, and adjusted (cash from operations (CFO) - dividends)/debt above 25%, all on a sustained basis.

Moody's could downgrade the ratings if (1) ABM's liquidity weakens such that it is unable to sign its senior loan facility within the 15 September 2021 long-stop deadline, or if its internal cash sources are insufficient to meet its cash needs over the next 12-18 months; (2) it is unable to effectively execute on its growth plans or if planned acquisitions materially weaken its credit metrics; (3) it fails to improve its consolidated earnings and cash flow; or (4) there is evidence of a cash leakage to its unrestricted power subsidiary, PT Anzara Janitra Nusantara (AJN).

Credit metrics indicative of a rating downgrade include adjusted debt/EBITDA above 4.0x, adjusted EBIT/interest below 2.0x and adjusted (CFO - dividends)/debt below 20%.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed on the Indonesian Stock Exchange since 2011, ABM Investama Tbk (P.T.) is an integrated energy company with investments in coal mining, mining services, engineering and logistics, and power generation.

The Hamami family controls 79% of ABM through PT Tiara Marga Trakindo (23%) and Valle Verde PTE LTD (56%). The remaining shares are held by the public.  (ends)