Moody's downgrades Berau to Caa2; outlook negative
Wednesday, May 20 2015 - 12:46 AM WIB
This action concludes the review for downgrade initiated on 14 January 2015.
"The downgrade to Caa2 reflects Moody's view that it is increasingly uncertain whether BCE will be able to execute its proposed notes exchange prior to the maturity of its bonds on 8 July 2015" says Brian Grieser, a Moody's Vice President and Senior Analyst. "Competing bids to acquire the equity of Asia Resource Minerals (ARMS), an 84.7% owner of BCE, have already delayed restructuring plans and will obstruct restructuring efforts until the board of ARMS reconvenes its general meeting of shareholders to vote on the proposed restructuring plan and the ARMS acquisition proposals."
The initial offer from NR Holdings Limited (NRH, unrated), a trust for the benefit of Nathaniel Rothschild, proposed a capital injection of roughly $100 million, the repayment of up to $143 million principal of notes, the extension of the 2015 and 2017 notes to 2019 and 2020, respectively, a reduction in the coupon and certain other changes to the existing bond indentures.
Asia Coal Energy Ventures Limited (ACE, unrated), funded by Indonesia's Sinarmas Group (unrated), countered with an offer to buy all outstanding shares and implement a $150 million equity injection while executing a notes restructuring at substantially similar terms as proposed in the original restructuring plan. Following the announcement by ACE, NRH and SUEK PLC (Ba3 negative) announced a potential joint cash offer to purchase all outstanding shares. ARMS board is currently evaluating the two offers.
"The Caa2 rating incorporates Moody's view that the notes restructuring will be completed at terms substantially similar to those currently proposed in which bondholders receive restructured bonds at par value and will receive a partial repayment of 10-15% of the notes currently outstanding" added Grieser, who is the lead analyst on BCE.
While the bids by NRH and ACE have expressed the intent to restructure the notes at par, the timing and ultimate recovery following the restructuring is uncertain at this time given the likely change in ownership at ARMS.
The adjourned general meeting of shareholders to vote on the restructuring must be continued by 31 July 2015, which is after the notes maturity date. The shareholder vote has now been adjourned on two separate occasions.
The negative outlook reflects the uncertainty created by the two competing bids for ARMS as well as the expected default in the next 60 days either through missed principal payment or distressed exchange.
The ratings could be downgraded if the company is unable to execute a restructuring over the next 6-9 months or if the terms of the proposed restructuring plan were changed such that recovery weakens for bondholders.
The ratings are unlikely to be upgraded prior to completion of the restructuring. Upon completion of the notes restructuring and settlement of the competing bids to buy ARMS between NRH and ACE, the ratings could be upgraded one to two notches depending on the level of debt repayment, BCE's operating performance and post restructuring financial and corporate governance policies.
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)