Moody's downgrades ABM Investama's ratings to B1; outlook revised to stable
Thursday, May 9 2019 - 08:35 AM WIB
(Singapore, May 09, 2019) -- Moody's Investors Service ("Moody's") has downgraded to B1 from Ba3 the corporate family rating (CFR) of ABM Investama Tbk (P.T.) ("ABM") and the rating on its $350 million senior unsecured notes due 2022.
The outlook has been revised to stable from negative.
RATINGS RATIONALE
"The downgrade reflects our expectation that ABM's credit profile will weaken considerably following the loss of a key customer at its mining services subsidiary, PT Cipta Kridatama (CK)," says Maisam Hasnain, a Moody's Analyst.
In March 2019, CK stopped mining service operations at two mines owned by Indonesian thermal coal producer Toba Bara Sejahtra Tbk (P.T.). This follows the early termination of a contract at Toba Bara's third coal mine in December 2018. Moody's estimates these contracts contributed around 22% of ABM's consolidated revenue and 17% of reported EBITDA in 2018.
As a result of the lost earnings from these contracts, and based on Moody's medium-term price assumptions for thermal coal, Moody's estimates that ABM's adjusted leverage -- as measured by adjusted debt/EBITDA -- will increase to around 3.6x in 2019 from around 2.0x in 2018. Consequently, ABM's leverage is no longer in line with Moody's expectations for its previous Ba3 rating.
ABM's business profile has also become less diversified, and it is increasingly reliant on coal sales, which in turn are subject to considerable price volatility. Moody's estimates coal sales from ABM's two operating mines will constitute around 50% of consolidated revenue in 2019, compared to around 36% in 2018.
ABM aims to partially offset the lost revenue by obtaining new customers. It plans to complete a $60 million minority investment in an Indonesian thermal coal producer by June 2019. According to ABM, the investment is subject to it obtaining service agreements that provide for a minimum level of revenue and earnings from the target company.
"However, the proposed $60 million investment, once completed, will weaken ABM's liquidity buffer. Such reduced liquidity could weaken the company's ability to fund a separate new acquisition of a majority stake in another coal mine," says Maisam Hasnain, also Moody's lead analyst for ABM.
ABM's B1 CFR incorporates Moody's expectation that ABM will continue to seek a majority stake acquisition in a coal mine over the next 6-12 months to offset the depleting coal reserves at its Tunas Inti Abadi mine, which only had around 14 million tons of coal reserves left as of December 2018.
ABM's business profile will weaken further if uncertainty continues over the company's ability to acquire suitable coal assets in the near term, or if it raises considerable debt to fund the acquisition.
The stable outlook reflects Moody's expectation that ABM will increase its coal production volumes and extend the mine life in the next 12 months, while maintaining prudent financial policies.
A near-term upgrade is unlikely given today's downgrade. However, upward rating pressure could develop over time if ABM improves its operating performance and materially increases its coal reserves.
Credit metrics indicative of a rating upgrade include adjusted debt/EBITDA below 3.0x, adjusted EBIT/interest above 2.5x, and adjusted (CFO - dividends)/debt above 25% on a sustained basis.
On the other hand, the ratings could be downgraded if ABM: (1) fails to improve consolidated earnings and cash flow; or (2) fails to extend its mine life in the near term and/or increase its coal production volumes; or (3) there is evidence of cash leakage to its unrestricted power subsidiary, PT Anzara Janitra Nusantara.
Credit metrics indicative of a ratings downgrade include adjusted debt/EBITDA above 4.0x, adjusted EBIT/interest below 2.0x, and adjusted (CFO - dividends)/debt below 20% on a sustained basis.
The principal methodology used in these ratings was Mining published in September 2018. 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)