Moody's downgrades Berau to Caa1; on review for further downgrade
Thursday, January 15 2015 - 06:20 AM WIB
The ratings remain on review for further possible downgrade.
"The downgrade to Caa1 reflects the increased likelihood of a distressed exchange occurring over the coming quarters coupled with a challenging operating environment driven by persistently weak coal prices," says Brian Grieser, a Moody's Vice President and Senior Analyst. The downgrades follow statements made by the company's majority shareholder, Asia Resource Minerals plc (ARMS, unrated), that the company would likely seek to extend the maturity of its $450 million notes due July 2015.
Moody's would view the extension of the notes as coercive to bondholders and inconsistent with its original promise to repay the notes as it would have the effect of allowing BCE to avoid a payment default at maturity. As such, the extension of all or part of the notes would be viewed as a distressed exchange under Moody's definition of default.
"The review for downgrade will focus on both the outcome of February's General Meeting at ARMS and the terms of the company's refinancing plans" added Grieser, who is the lead analyst on BCE.
The 4 February 2015 General Meeting of shareholders was requisitioned by Borneo Bumi Energi and Metal Pte Ltd (Borneo, unrated), a Samin Tan-controlled vehicle that controls 23.8% of ARMS, to vote on its proposal to remove three independent directors and replace them with their own nominees. Moody's believes the ongoing shareholder disagreements create an environment that is not conducive to executing the company's restructuring plans and could exert further pressure on ratings if such disagreements are not resolved over the next couple of weeks.
The review will also focus on the terms proposed to restructure the 2015 notes. While the company had roughly $331 million of cash at 31 December 2014, we anticipate that the company would maintain a large portion of its cash balances as opposed to repaying debt. As such, the current rating anticipates that any unpaid portion of the notes principal will be extended at par and that proforma interest rates will be largely consistent with the existing notes. Any deviation from these expectations could have negative implications for recovery and therefore ratings.
The rating review is expected to be completed over the next 60-90 days.
The ratings could be downgraded if any of the following were to occur: 1) the outcome of the general meeting of shareholders resulted in a board that did not contain a majority of independent directors; 2) BCE were to propose an extension that included a reduction in the par value of the bonds or a lower interest rate or 3) the restructuring had any impact on the $500 million notes due 2017, whose timely repayment may also be increasingly at risk.
The ratings are unlikely to be stabilized prior to the successful restructuring of BCE's 2015 notes. Further, if the company were successful in raising incremental equity and collecting the $173 million due from its former president director, Rosan Roselani, and demonstrated both the willingness and ability to repay the notes at par, ratings could be stabilized or even upgraded.
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 2.6 billion tons, with probable and proven reserves estimated at 512 million tons (mt). (ends)