Moody's downgrades Berau Coal to B2; outlook remains negative

(Singapore, August 14, 2014) -- Moody's Investors Service has today downgraded the corporate family rating of PT Berau Coal Energy Tbk's (BCE) to B2 from B1 as well as the senior secured ratings on the bonds issued by BCE and Berau Capital Resources Pte Ltd, which are guaranteed by BCE.

The outlook for all ratings remains negative.

At the same time, Moody's has withdrawn the provisional (P)B1 rating assigned to Berau Capital Resources II Pte. Ltd.'s proposed senior secured notes on 25 July 2014, as the issuance has been postponed. BCE announced on 12 August that the company had decided not to proceed with the proposed bond transaction due to adverse market conditions. The company intends to proceed with the refinancing plans when market conditions permit.

"The downgrade of BCE's ratings to B2 was driven by a combination of the sustained decline in thermal coal prices, resulting in the weakening of earnings and cash flows, and the increasing refinancing risk with its USD450 million senior secured notes maturing in less than 12 months" says Brian Grieser, a Moody's Vice President and Senior Analyst. "The decision to postpone its proposed offering reduces Berau's much-needed financial flexibility and exposes the company to ongoing market risk during a period of prolonged operating weakness and significant transition at both the management and board levels."

"BCE's cash buffer supports its B2 ratings in an environment where we expect free cash flow to be modestly negative over the next 12-18 months," adds Grieser, who is also lead analyst for BCE. Cash balances at 31 March 2014 were roughly USD365 million. Moody's expects BCE's management to continue implementing cost reduction measures, focus on cash preservation and defer any large expansionary capex plans until coal prices experience a meaningful improvement.

"The rating also accommodates our expectation that earnings deterioration will drive BCE's financial leverage higher in 2014-15, towards 4.5x-5.0x from 3.8x in March 2014," says Grieser.

The negative outlook reflects the continued pressure on BCE's credit metrics driven by the persistent decline in thermal coal prices since 2012 and also takes into account Moody's expectation that coal prices will remain under pressure over the next 12 months offsetting the benefits of cost cutting and cash preservation initiatives.

Moody's will continue to monitor corporate governance and accountability at BCE following the recent round of management changes and the completed separation between BCE's parent, Asia Resource Minerals plc (ARM, unrated) and the Bakrie Group (unrated). We believe the company's willingness to delay the refinancing to seek better terms and its efforts to loosen covenants in the existing bonds, allowing for incremental debt, indicate a somewhat more aggressive financial posture.

We have revised our downgrade triggers to reflect our current view on BCE's credit profile. A rating downgrade would occur if 1) BCE is unable to refinance its $450 million senior secured notes over the next few months; 2) Coal prices fail to stabilize and thus fall short of our $75-80 per ton target in the next twelve months; 3) there is a material decline in BCE's cash balances driven by earnings declines, large expansionary capex projects or debt-funded acquisitions.

Specific indicators Moody's would look for include adjusted debt/EBITDA exceeding 5.5x, and/or EBIT/interest falls below 1.5x.

Other negative rating triggers include: 1) any adverse decisions regarding the off-setting of payments for VAT; or 2) any change in laws and regulations, particularly in relation to mining concessions that would adversely affect BCE's business.

Upward rating momentum is limited given the negative outlook and our view that deleveraging will be challenging in the current pricing environment. Nonetheless, a positive ratings action would require a successful refinancing and BCE maintaining its financial leverage below 4.0x and EBIT/interest above 2.5x for an extended period. Any positive action would also require BCE to exhibit a strong liquidity profile in concert with an improvement in realized coal prices.

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 2.2 billion tons, with probable and proven reserves estimated at 509 million tons (mt). (ends)