Moody's downgrades Bumi Resources to B2
Saturday, February 23 2013 - 07:17 AM WIB
"The downgrade reflects our assessment that the likelihood of Bumi Resources lowering its adjusted debt to EBITDA ratio to below 4.5x over the next 12-18 months is low," says Simon Wong, a Moody's Vice President and Senior Analyst.
"The weakness in coal prices will continue to pressure the company's operating margins and limit its ability to generate sufficient free cash flow to lower its leverage in a timely manner," adds Wong, also the Lead Analyst for Bumi Resources.
In addition, the firm's average selling price will come under further pressure in 2013, as it will renegotiate its coal contracts based on the current lower prices. Moody's expects the price of Newcastle thermal coal -- the benchmark price for seaborne coal in Asia -- to average around $90-$95 per ton in 2013.
Moody's also expects the company's adjusted debt/EBITDA to remain between 5x and 6x until 2014. The potential recovery of the amounts due from third parties, such as PT Recapital Asset Management and Bukit Mutiara, as well as a possible sale of its stakes in Fajar Bumi Sakti -- one of its coal mining assets -- will not be adequate to bring down its leverage to a level that is appropriate for the B1 rating.
In addition, while the uncertainties related to the ongoing shareholder disputes at Bumi Plc have eased with the now likely separation of Bumi Resources from Bumi Plc, corporate governance at Bumi Resources remains an issue.
In addition, Moody's is concerned about the company's high level of debt and the liquidity risk at the holding company level, given the structural separation from the underlying coal assets which are largely responsible for the group's cash flow.
On the other hand, the stable outlook reflects Moody's expectation that Bumi Resources will focus on its strategic priorities, including the refinancing of its upcoming maturities in a timely manner, lowering costs at its coal mines, and reducing its interest burden.
Bumi Resources had consolidated debt of $4.28 billion at end-September 2012, of which $614 million falls due over the next 12 months and will need to be refinanced. Key maturities include a $150 million loan at Bumi Resources due in August 2013 and $406 million of loans maturing at Bumi Resources Minerals (unrated) -- in which the company has an 87.09% stake -- in September 2016.
The ratings are unlikely to be upgraded in the near term. However, if Bumi Resources can successfully reduce its debt level, such that its consolidated debt/EBITDA falls below 4.5x and adjusted consolidated EBIT/interest expense exceeds 2.0x on a sustained basis, then Moody's would consider upgrading the ratings.
Downward pressure could emerge if Bumi Resources is unable to successfully execute its refinancing plans in a timely manner or if it continues with its capacity expansion plans while industry fundamentals remain weak.
Indicators that Moody's would consider for a downgrade include: adjusted consolidated debt/EBITDA at above 5.5x-6x or adjusted consolidated EBIT/interest expense of below 1.0-1.5x on a sustained basis.
Other negative rating triggers include: (1) continued uncertainty from further shareholder disputes; (2) any adverse regulatory decision regarding off-setting of value-added tax payments; or (3) any change in laws and regulations, particularly with regard to mining concessions, that would adversely affect the business.
The principal methodology used in these ratings was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Bumi Resources is Indonesia's largest thermal coal producer and one of the three largest thermal coal exporters globally. Through its principal assets (a 65% stake in PT Kaltim Prima Coal and a 70% stake in PT Arutmin), Bumi produced 66 million tons of coal in 2011 and which accounted for approximately 19% of Indonesia's total coal production.
Its non-coal resource holding company, Bumi Resources Minerals, was listed on the Indonesian Stock Exchange on 9 December 2010. Bumi Resources currently owns 87.09% of Bumi Resources Minerals.
Bumi Plc, previously known as Vallar Plc, currently has a 29.2% stake in Bumi Resources. (ends)