Moody's: Proposed notes restructuring will improve Berau's liquidity profile

(Singapore, March 19, 2015) -- Moody's Investors Service says Berau Coal Energy Tbk's (BCE, Caa1 review for downgrade) recently announced restructuring plan for its guaranteed senior secured notes due 2015 and 2017 will ease mounting refinancing pressure and improve its liquidity profile, and could therefore lead to moderate ratings upside, if approved. Current ratings remain unchanged and continue to be reviewed for downgrade, until the proposal is approved.

On 18 March, Asia Resource Minerals plc (ARMS, unrated) -- 85%-owner of BCE -- announced the terms of the proposed restructuring plan. Under the proposed transaction, BCE will pay a portion of the notes principal using $100 million of new equity proceeds raised at ARMS and $18.75 million of cash-on-hand. The unpaid portion of the $450 million notes due 2015, issued by Berau Capital Resources Pte. Ltd. and guaranteed by BCE, and $500 million notes due 2017, issued by BCE, will be exchanged for new notes maturing in July 2019 and December 2020, respectively. The proposed restructuring also aims to reduce the coupon on the new notes, comprising both a cash and paid-in-kind component.

"The proposed balance sheet restructuring, if executed, will be positive for BCE in that it marginally reduces outstanding debt, lowers the cash coupon and pushes back the looming maturity of its 2015 notes, which the company has had difficulty refinancing to date," says Brian Grieser, a Moody's Vice President and Senior Analyst.

While there is no haircut to the notes principal in the proposal, Moody's views the extension of the notes as coercive to noteholders and inconsistent with its original promise to repay the notes as it has the effect of allowing BCE to avoid a payment default at maturity. As such, Moody's would view the proposed restructuring plan as a distressed exchange under Moody's definition of default.

"BCE's ratings will remain on review for possible downgrade until the notes are successfully restructured. Assuming the proposed terms are agreed to by noteholders, the ratings would likely be stabilized or potentially upgraded post-transaction," adds Grieser, who is also Lead Analyst for BCE.

Based on the proposed plan, the next material maturity will be in 2019 which will allow management to focus on managing its thermal coal business, which has been negatively impacted by persistently weak coal prices.

The transaction is subject to lender approval and will be subject to the successful equityraising at ARMS; creating uncertainty around the timing of completion. The notes restructuring requires approval from at least 75% of noteholders while the equity offering -- as previously announced on 9 February 2015 -- will require simple majority of ARMS' shareholders' approval.

If the transaction goes through, BCE will have a significantly improved maturity profile and lowered leverage by 0.75x to 1.0x. Incremental debt reduction is expected once BCE or PT Berau Coal (unrated) execute a new $50 million revolving credit facility. Debt-to-EBITDA was approximately 4.8x at September 30, 2014.

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)