Moody's downgrades Bumi Resources to Caa3; outlook remains negative

(Singapore, November 18, 2021) -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Bumi Resources Tbk (P.T.) (Bumi) to Caa3 from Caa1.

At the same time, Moody's has downgraded the ratings on the backed senior secured notes due 2022 issued by Bumi's wholly owned subsidiary, Eterna Capital Pte. Ltd., and guaranteed by Bumi. Specifically, Moody's has downgraded: (1) the Series A notes to Caa3 from Caa1, and (2) the Series B notes to Ca from Caa2.

The outlook remains negative.

"The downgrade of Bumi's CFR to Caa3 reflects the elevated risk of a near-term debt restructuring or an event of default given Bumi's large debt maturities due in December 2022 and weak recovery prospects for its creditors", says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

RATINGS RATIONALE

"Bumi's rising debt burden, due to the slow pace of its principal repayments and the compounding effect of payment-in-kind (PIK) interest for the majority of its debt, has increasingly strained its capital structure," adds Hasnain, also Moody's Lead Analyst for Bumi.

As a result, Bumi's aggregate debt balance (including its mandatory convertible bonds) has increased to around $2.6 billion as of October 2021, from around $2.4 billion immediately after completing its debt restructuring in December 2017.

Assuming a Newcastle thermal coal price of around $110 per metric ton in 2022, Moody's estimates Bumi can repay $240 million in principal under its Series A notes and Tranche A facilities (collectively referred to as 'Tranche A') over the next 12 months.

While principal repayments under Tranche A will be higher if coal price remains above this price assumption, most of Bumi's remaining debt will still be outstanding at maturity in December 2022.

Therefore, the likelihood of a default or a debt restructuring over the next 12 months is high. Such a scenario will also potentially result in large economic losses to Bumi's creditors.

As of October 2021, aside from Bumi's outstanding Tranche A debt of around $320 million, outstanding debt maturing in December 2022 includes $866 million under Tranche B, $621 million under Tranche C, and $100 million under contingent value rights. Principal under Tranche B and C will increase further over the next 12 months as their PIK interest gets accrued and added to debt.

The persistent high debt levels and unsustainable capital structure also highlight risks associated with Bumi's financial strategy and risk management, which are key considerations under Moody's governance risk assessment framework.

As a holding company, Bumi is wholly reliant on cash dividends from its 51%-owned subsidiary, Kaltim Prima Coal (P.T.) (KPC) to service its debt. Bumi's 90%-owned subsidiary, Arutmin Indonesia (P.T.) has yet to pay dividends. Arutmin has certain outstanding liabilities it needs to pay off before it can initiate dividend payments and is thus unlikely to contribute meaningful dividends over the next 12 months.

Moody's also expects the coal contract of work (CCoW) mining licenses at KPC, which expires in December 2021, will be extended on broadly similar terms. Regulatory uncertainty around the CCoW extension has decreased following Arutmin's 10-year license extension in November 2020. An inability to extend KPC's mining license would further weaken Bumi's credit profile, as KPC is currently the sole cash flow contributor to Bumi.

Bumi's Series B senior secured notes are rated one notch lower than Bumi's CFR and its Series A senior secured notes to reflect their relative subordination as per the terms of the cash waterfall, whereby interest on Series B notes will only be paid once the principal on Series A is fully repaid.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS

Bumi's ESG Credit Impact Score is Very Highly Negative (CIS-5), reflecting the company's very high exposure to environmental risks and high exposure to social risks stemming from thermal coal mining operations, and very high exposure to governance risks stemming from its unsustainable capital structure.

The company's exposure to environmental risk is Very Highly Negative (E-5 Issuer Profile Score), driven by very high carbon transition risks for thermal coal, Bumi's key earnings driver.

Bumi's exposure to social risk is Highly Negative (S-4 Issuer Profile Score), driven primarily by coal mining's high exposure to human capital, health and safety, responsible production and demographic and societal trends.

Bumi's exposure to governance risk is Very Highly Negative (G-5 Issuer Profile Score), reflecting Bumi's high debt levels, history of debt restructuring, its complex organizational structure, and reliance on cash dividends from one subsidiary to service its debt. However, the presence of KPMG Services Pte. Ltd. as an independent monitoring accountant and the waterfall mechanism under a Cash Account Management Agreement (CAMA) provide transparency around cash movements at the holding company level.

OUTLOOK

The negative outlook reflects Moody's view that recovery prospects for Bumi's creditors could weaken further over the next 12 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of Bumi's ratings is currently unlikely, and would be conditional upon the company establishing a sustainable capital structure with manageable debt maturities.

Bumi's ratings could be downgraded further if the risk of an event of default intensifies, or if recovery prospects for the company's creditors weakens further.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Bumi Resources Tbk (P.T.), through its majority-owned subsidiaries, is Indonesia's largest thermal coal producer. The company produced around 81 million tons of coal for the 12 months ended June 2021. Its principal assets include a 51% stake in Kaltim Prima Coal (P.T.) and a 90% stake in Arutmin Indonesia (P.T.).  (ends)