Moody's downgrades Indika to B3; outlook negative

(Singapore, December 14, 2015) -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Indika Energy Tbk (P.T.) (Indika) and the ratings on the $300 million notes due 2018, issued by Indo Energy Finance B.V. and the $500 million notes due 2023, issued by Indo Energy Finance II B.V. to B3 from B2.

The two bond issuing entities are wholly-owned subsidiaries of Indika and both notes are unconditionally guaranteed by Indika.

The outlook on all ratings is negative.

This action concludes the review for downgrade initiated on 24 November 2015.

RATINGS RATIONALE

"The ratings downgrade to B3 reflects Indika's weak credit metrics, including a balance sheet that will remain highly leveraged following the proposed bond repurchase, and our view that continued low prices for thermal coal will pressure Indika's earnings and cash flows in 2016 and 2017," says Brian Grieser, a Moody's Vice President and Senior Analyst.

Indika's primary source of cash flows comes from dividends paid by 46% owned PT Kideco Jaya Agung (Kideco, unrated), Indonesia's third-largest domestic coal producer. Continued pressure on thermal coal prices over the past few years has led to a significant reduction in dividends from Kideco to $65 million in 2015 and potentially around $50 million in 2016, based on Moody's estimates, compared to $207 million in 2012.

With lower dividends from Kideco and reduced earnings at Indika's key consolidated subsidiaries -- Tripatra (unrated), PT Petrosea Tbk (unrated) and PT Mitrabahtera Segara Sejati Tbk (unrated) -- we do not anticipate a material improvement in Indika's credit or liquidity profile over the next 12-18 months.

However, the rating reflects Moody's expectations that Indika's liquidity will remain adequate given its high cash balances and manageable refinancing risk over the next 12 to 18 months.

On 8 December 2015, Indika announced the early tender results pursuant to its 23 November tender offer to buy back up to $100 million of its $300 million notes due 2018 at a price of $600 to $650 per $1,000. According to this announcement, Indika plans to increase the tender cap to $128.6 million in order to repurchase all the notes tendered at $600 per $1,000 principal issued.

"The B3 CFR takes into account the company's post-repurchase capital structure. The rating captures 1) the minor benefits of Indika's notes repurchase, in terms of pro-forma debt and interest reduction; and 2) the modest weakening of liquidity given the expected use of cash to fund a part of the repurchase," adds Brian Grieser, who is the lead analyst for Indika.

Moody's does not view this discounted bond repurchase as a distressed exchange. Moody's does not believe default avoidance is clear at this time given the bond maturity is more than two years away and Indika maintains high cash balances. However, Moody's definition of distressed exchanges, which we consider a default, captures cumulative losses for investors. Therefore, subsequent discounted note repurchases could be treated as a distressed exchange when viewed in combination with the current proposed transaction.

The negative outlook reflects the weak underlying pricing power of Indika and its subsidiaries given the persistent weakness in thermal coal prices.

A ratings downgrade could arise if liquidity were to deteriorate or if coal prices continue to decline such that leverage were to increase and remain over 6.5x for an extended period. A deterioration in liquidity, such that holding company cash falls below $175 million, could also lead to a downgrade.

A ratings upgrade is unlikely over the next 12 months given the weak outlook for thermal coal. Nonetheless, upward rating pressure would evolve if Indika were to successfully refinance the balance of its 2018 notes or coal prices were to improve such that earnings, including dividends from its subsidiaries, supported leverage below 5.0x. A ratings upgrade would require Indika to maintain a solid liquidity profile with over of $200 million of available cash at the holding company level.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Indika Energy Tbk (P.T.) is an Indonesian integrated energy group listed on Indonesia's Stock Exchange. Its principal investment for its energy resources group is a 46% stake in Kideco Jaya Agung (P.T.), Indonesia's third-largest domestic coal producer and one of the world's lowest-cost producers and exporters of coal. It also owns a 60% stake in PT Mitra Energi Agung, a greenfield coal project, and 85% of PT Multi Tambang Jaya Utama, a domestic thermal and coking coal project. (ends)