Moody's: Potential unwinding of ARM would be credit negative for Berau Coal
Thursday, May 8 2014 - 02:12 PM WIB
On 6 May, ARM, which owns 84.7% of Indonesian coal miner BCE, announced that a number of the company's major shareholders had proposed to unwind the UK-based holding company and delist it from the London Stock Exchange. The proposal was put forward by Samin Tan-controlled affiliates -- Borneo Lumbung Energi and Metal (unrated) and RACL (unrated) -- which own 48% of ARM.
To enact the distribution, ARM would allocate its shares in BCE to ARM shareholders. The shareholders proposing the transaction believe it would lower costs and could potentially lead to a distribution in excess of $500 million. ARM had initially indicated it would use at least $400 million of the $501 million in proceeds from the sale of its stake in Bumi Resources Tbk (P.T.) (Bumi, Ca stable) in March 2014 to fund a shareholder distribution.
"If the proposal goes through and if the shareholder distribution exceeds cash balances at ARM, it would likely impact BCE's already weakly-positioned B1 rating as it may require a distribution from BCE," says Brian Grieser, a Moody's Vice President and Senior Analyst.
"Any decline in BCE's cash balance would erode the company's liquidity position which is key in providing financial flexibility during a period when weak coal prices are pressuring margins and cash flows," adds Grieser, who is also lead analyst for Berau.
While ARM had modest cash balances as of 31 December 2013, excluding cash at BCE, Moody's believes this to now be over $500 million following the sale of Bumi Resources in March. Accordingly, any payout in excess of ARM's cash balances would require a contribution from BCE, which had $408 million of unrestricted cash as of 31 December 2013. At this point, BCE's intended use of cash balances remains unclear.
"In our view, a weaker liquidity profile due to a more aggressive financial posture at BCE would also increase BCE's refinancing risk as such shareholder-friendly moves will not be viewed positively by potential lenders at a time when BCE is focusing on refinancing nearing maturities" says Grieser. The company's next maturity is in July 2015 when its $450 million 12.5% senior secured notes come due.
With a delisting of ARM, which consolidates the financial statements of BCE, BCE would no longer be subject to the listing rules of the UK regulatory body, Financial Conduct Authority.
ARM aims to reach a decision on whether to proceed with the BCE share distribution by 3 June. Certain other shareholders have indicated a preference to maintain the existing corporate and governance structure, so the proposed distribution and de-listing is by no means assured.
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 2.2 billion tons, with probable and proven reserves estimated at 509 million tons (mt). (ends)