Moody's revises outlook on ABM to negative

(Singapore, May 20, 2020)--Moody's Investors Service has affirmed the B1 corporate family rating (CFR) of ABM Investama Tbk (P.T.) and the B1 rating on its $350 million senior unsecured notes due 2022.

At the same time, Moody's has revised the outlook on these ratings to negative from stable.

RATINGS RATIONALE

"The change in ABM's outlook to negative from stable reflects our expectation that its credit metrics will deteriorate over the next 12 months, amid a challenging operating environment including weak thermal coal prices," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"At the same time, the affirmation of ABM's B1 ratings reflects (1) its integrated operations, which support its operating performance through cost synergies; and (2) its adequate liquidity with no material near-term debt maturities," adds Hasnain, who is also Moody's Lead Analyst for ABM.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

More specifically, ABM is exposed to weak thermal coal prices, which are likely to remain low over the next 12 months as the coronavirus-led economic downturn reduces demand for thermal coal.

Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today's action reflects the impact on ABM of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Based on its medium-term price assumptions for Newcastle thermal coal of $60-$65 per ton, Moody's estimates that, as a result of weak earnings and cash flow, ABM will maintain adjusted EBIT/interest of around 1.3x and adjusted (CFO-dividends)/debt of around 17% over the next 12-18 months. This would be in breach of the downward rating triggers for its B1 ratings of 2.0x and 20% respectively.

The earnings contraction will primarily be driven by lower earnings at its wholly owned mining subsidiary, PT Reswara Minergi Hartama, due to lower coal prices. Reswara, with three operating mines, is the largest earnings contributor, accounting for around half of ABM's reported revenue in 2019.

Reswara's coal is produced predominantly through PT Mifa Bersaudara (MIFA) which produced 7.1 million tons in 2019. ABM is increasing production at its MIFA mine to compensate for the declining production at its PT Tunas Inti Abadi (TIA) mine, which produced four million tons in 2019 and will likely run out of coal reserves by 2022.

However, MIFA has a short track record of ramping up volumes, which will lead to execution risk. Also, MIFA's coal has lower calorific value than TIA's and is sold predominantly to India. Thus, any material reduction in Indian coal imports will reduce MIFA's coal sales.

In light of weak coal prices and slowing economic growth, the downside risk to ABM's credit metrics worsening beyond Moody's current expectations is elevated, particularly if ABM's sales volume declines this year, or if coal prices remain low for a prolonged period.

There is also uncertainty over the financial health of the external customers for ABM's mining services business, operated by its subsidiary PT Cipta Kridatama (CK). Most of these customers are private companies with limited public information, and their ability to maintain profitable operations amid weak coal prices is relatively untested.

ABM has sufficient liquidity to meet its cash needs for the next 12-18 months, with no significant debt maturities until August 2022, when its $350 million bond comes due. Moody's expects ABM to refinance its bond well ahead of maturity date. A material reduction in its cash balance of around $102 million as of 31 December 2019 would likely lead to a downgrade.

The rating also considers ABM's exposure to ESG risks as follows.

First, ABM faces elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries seek to reduce their reliance on coal power. A reduction in global demand for thermal coal may weaken prices and hurt ABM's credit metrics, given that around 72% of the company's revenue was generated from coal mining and mining contracting in 2019.

Second, ABM is also exposed to social risks associated with the coal mining industry, including health and safety. The company has implemented processes to ensure occupational safety and conducts safety training and health checks for its employees. The company also engages with and supports the local communities where its mines are located.

With respect to governance, ABM's ownership is concentrated in the Hamami family, which held an approximate 79% stake in ABM in 2019, and has provided operational and financial support to ABM in the past. Although ABM's $60 million minority investment in the promoter-owned mining company PT Multi Harapan Utama in 2019 was a related-party transaction, it obtained a fairness opinion and sought bondholders' consent to complete the investment.

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

An upgrade of ABM's ratings is unlikely over the next 12-18 months, given the negative outlook.

The outlook could return to stable if ABM improves its credit metrics on a sustained basis, and maintains sufficient liquidity to cover its cash needs over the next 12-18 months.

Specific indicators that Moody's would consider for a change in outlook to stable include adjusted debt/EBITDA below 4.0x, adjusted EBIT/interest above 2.0x, and adjusted (CFO - dividends)/debt above 20%, all on a sustained basis.

Moody's could downgrade the ratings if (1) ABM fails to improve its consolidated earnings and cash flow; (2) it fails to extend its mine life in the near term or increase its coal production volume, or both; (3) its liquidity weakens; or (4) there is evidence of cash leakage to its unrestricted power subsidiary, PT Anzara Janitra Nusantara (AJN).

Specific indicators that Moody's would consider for a downgrade include adjusted debt/EBITDA above 4.0x, adjusted EBIT/interest below 2.0x, and adjusted (CFO - dividends)/debt below 20%.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/research/Mining--PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed on the Indonesian Stock Exchange since 2011, ABM Investama Tbk (P.T.) is an integrated energy company with investments in coal mining, mining services, engineering and logistics, and power generation.

The Hamami family controls 79% of ABM through PT Tiara Marga Trakindo (23%) and Valle Verde PTE LTD (56%). The remaining shares are held by the public. (ends)