Moody's downgrades Berau Coal to B3; on review for further downgrade

(Singapore, November 06, 2014)-- Moody's Investors Service has downgraded the corporate family rating of PT Berau Coal Energy Tbk (BCE) to B3 from B2 as well as the senior secured ratings on the bonds issued by BCE and Berau Capital Resources Pte Ltd, which are guaranteed by BCE.

At the same time, the rating agency has placed all ratings on review for possible downgrade.

"The downgrade of BCE's CFR to B3 reflects both its weakening liquidity profile and our view that the persistent decline in thermal coal prices will lead to a material earnings and cash flow decline in 2015," says Brian Grieser, a Moody's Vice President and Senior Analyst.

"BCE's deteriorating operating performance coupled with the change in indirect control of voting rights at its parent, Asia Resource Minerals plc (ARMS, unrated), and uncertainty around plans to refinance its $450 million senior secured notes due July 2015 add to its weakened credit profile," adds Grieser, who is also the lead analyst for BCE.

In this year alone, the benchmark Newcastle thermal coal price index has plummeted 25% to a five-year low of $63 per metric ton due to weakening demand and chronic oversupply of coal inventories.

Absent a material improvement in coal prices in coming months, Moody's projects BCE's EBITDA to fall below $200 million in 2014 and approach $150 million in 2015, despite its success in reducing its mining costs for both 2014 and 2015.

In a further complication, ARMS disclosed that its largest shareholder Samin Tan -- who indirectly owns 47.6% of ARMS -- transferred the indirect control of 23.8% voting rights to Raiffeisen Bank International AG (A3 negative). We believe the transfer of voting rights terminates the shareholder agreement between Samin Tan and ARMS, which amongst other things allowed Samin Tan-associated entities to nominate board members.

"This latest development at ARMS injects uncertainty over board composition and corporate governance at the UK-listed entity which had just put in place a new board and management team early this year after its long-drawn separation from the Bakrie Group (unrated)," says Grieser.

Against the backdrop of BCE's unsuccessful bond deal in August and the ongoing coal price decline, the company faces heightened refinancing risk in light of the upcoming maturity in July 2015.

"Moody's review will focus on BCE's ability to successfully refinance the upcoming maturity and provide full recovery to existing bondholders," says Grieser. "The review will likely be completed over the next 60 to 90 days." Failure to produce a refinancing plan within this timeframe will likely lead to further downgrades.

We believe the lack of information with regard to BCE's refinancing plans, a weak operating environment and now renewed uncertainty at the ARMS level make for a challenging refinancing environment for BCE despite its large cash balances," adds Grieser.

At 30 June 2014, BCE had cash balances of $343 million which will provide some flexibility in its attempts to refinance its bond but is insufficient to fully refinance the maturing bond.

If the bonds have not been refinanced in the review period, BCE could face further downgrades. Moreover, Moody's could view a refinancing strategy that does not meet BCE's original obligation to bondholders as a distressed exchange under Moody's definition of default.

We will likely confirm BCE's ratings at B3, if BCE is able to successfully access the bond or loan market, to fund a full refinancing in accordance with its original obligation to pay. The current rating triggers of adjusted debt/EBITDA of around 5.5x and interest coverage of 1.5x will support a B3 rating confirmation. If the refinancing results in a material reduction in debt and operating conditions support leverage of around 4.5x, Moody's would consider taking a positive rating action.

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)