Moody's Ratings affirms Indika's Ba3 ratings, assigns Ba3 to proposed US dollar notes; outlook remains stable

(Singapore, April 17, 2024) -- Moody's Ratings has affirmed the Ba3 corporate family rating (CFR) of Indika Energy Tbk (P.T.), the Ba3 ratings on the backed senior secured notes due 2024 issued by Indika Energy Capital III Pte. Ltd., and the backed senior secured notes due 2025 issued by Indika Energy Capital IV Pte. Ltd.

At the same time, Moody's Ratings has assigned a first-time Ba3 rating to the proposed senior secured notes to be issued by Indika Energy Tbk (P.T.). The proceeds from the notes will primarily be used to fund a capped tender offer Indika has announced on its 2025 notes. The proposed notes will rank pari passu with Indika's outstanding US dollar notes.

The outlook remains stable.

"The affirmation of Indika's Ba3 CFR reflects the long operating track record of its thermal coal mining operations and Indika's continued adherence to conversative liquidity and balance sheet management, as evidenced by its proactive refinancing of its November 2024 notes maturities ahead of schedule and its planned refinancing of its October 2025 notes," says Maisam Hasnain, a Moody's Ratings Vice President and Senior Analyst.

RATINGS RATIONALE

In early April, Indika announced that it will redeem its $294 million outstanding notes due November 2024 on 3 May 2024 at par value. The notes will be funded through a new $300 million five-year loan from Bank Negara Indonesia (Persero) Tbk (P.T.) (BNI, Baa2 stable, baa3) and Bank Mandiri (Persero) Tbk (P.T.) (Baa2 stable, baa2) that Indika signed in December 2023.

The new loan, which demonstrates Indika's continued access to raise external debt, will lengthen Indika's debt maturity profile. Moody's Ratings also expects Indika to seek to refinance its $534 million notes due October 2025 well ahead of their scheduled maturity. On 17 April, Indika announced a tender offer to redeem its 2025 notes at 101.25 cents on the dollar, which will be funded by proceeds from its planned notes issuance. The tender offer will be capped at the amount that Indika will raise from its new notes.

Indika's credit quality remains supported by steady earnings and cash flows from its 91%-owned Indonesian thermal coal mining subsidiary, PT Kideco Jaya Agung (Kideco), which has a track record of maintaining stable production. Based on its expected coal production of around 30 million metric tons a year, Kideco has a reserve life of around 16 years.

Kideco has also exhibited the ability to reduce operating costs to maintain profitability during coal price downturns. Its revenue and earnings will decline this year based on Moody's Ratings' Newcastle thermal coal price of $110 per metric ton in 2024 compared with $170 per metric ton in 2023. Indika's leverage will increase to around 3.8x in 2024 from 2.8x in 2023. Nonetheless, leverage will subsequently decline to around 3.3x in 2025 due to scheduled debt amortization and a modest increase in earnings from non-coal businesses.

Indika's Ba3 CFR is premised on the company maintaining its conservative approach to new investments as it seeks to reduce its reliance on thermal coal for revenue. In recent years, the company has invested in a number of non-coal businesses while divesting its coal-related businesses.

The successful execution of Indika's ongoing investments - which include other minerals, nature-based solutions and the electric vehicle ecosystem - could stretch the company's management resources and increase its execution risk, particularly if earnings at Kideco are pressured by prolonged weak coal prices. Nonetheless, business diversification is critical to help Indika ultimately reduce its credit exposure to carbon transition risk (E-5 IPS) and increase its resilience to a secular decline in coal demand.

Indika will maintain good liquidity over the next 12-18 months, with its cash balance, projected operating cash flow and $203 million in proceeds from its sale of coal mining subsidiary PT Multi Tambangjaya Utama sufficient to meet its planned cash needs during this period. Furthermore, the company's proposed notes issuance will help address its October 2025 notes maturity and further extend its debt maturity profile.

OUTLOOK

The outlook is stable, reflecting Moody's Ratings' expectation that Indika will maintain (1) good liquidity while proactively refinancing debt maturities; (2) profitable and cash-generative operations; and (3) a conservative approach to investments and shareholder returns.

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

A near-term upgrade is unlikely, given Indika's current scale and the risks associated with its diversification strategy. Nonetheless, Moody's Ratings could upgrade the ratings over time if the company increases its scale and diversifies its business while maintaining a strong credit profile with minimal refinancing risk.

Specific indicators Moody's Ratings would consider for an upgrade include adjusted debt/EBITDA below 2.5x and adjusted EBIT/interest above 3.0x on a sustained basis.

On the other hand, Moody's Ratings could downgrade the ratings if (1) Indika's internal cash sources are insufficient to meet its cash needs over the subsequent 12-18 months; (2) industry fundamentals deteriorate, leading to a further worsening in Indika's credit metrics; or (3) the company engages in aggressive investments or shareholder distributions.

Specific indicators Moody's Ratings would consider for a downgrade include adjusted debt/EBITDA above 4.0x or adjusted EBIT/interest below 2.0x on a sustained basis.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Indika Energy Tbk (P.T.) is an Indonesian firm with investments primarily within the energy value chain. Its principal investment is a 91% stake in Kideco Jaya Agung (P.T.), one of Indonesia's largest coal producers. Indika is listed on the Indonesian Stock Exchange with a market capitalization of around IDR8.0 trillion ($0.5 billion) as of 16 April 2024. (ends)