Moody's revises outlook on BUMA to negative

(Singapore, April 17, 2020) -- Moody's Investors Service has affirmed Bukit Makmur Mandiri Utama (P.T.)'s (BUMA) Ba3 corporate family rating (CFR) and the Ba3 rating on its senior secured notes.

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

RATINGS RATIONALE

"The change in BUMA's outlook to negative from stable reflects our expectations that amid an already challenging operating environment, BUMA's credit metrics and liquidity will weaken further following the loss of a key customer," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"At the same time, the affirmation of BUMA's Ba3 ratings reflect its (1) position as Indonesia's second-largest coal mining services contractor by overburden volume, with a well-recognized franchise and established relationships with Indonesia's largest coal miners; and (2) our expectation that BUMA will maintain a prudent capital structure with conservative financial policies," adds Hasnain, who is also Moody's Lead Analyst for BUMA.

BUMA's mining service contract with its third largest customer, Kideco Jaya Agung (P.T.), a subsidiary of Indika Energy Tbk (P.T.) (Ba3 stable) will not be extended this year. This is because Indika has decided to gradually transfer mining services at Kideco from BUMA to its own mining contractor in the coming months. Moody's previously expected that the Kideco contract, which generated 9% of BUMA's consolidated revenues in 2019, would be renewed at broadly similar terms.

As a result of the expiring Kideco contract, Moody's expects BUMA's adjusted leverage -- as measured by adjusted debt/EBITDA -- to increase by around 0.3x from its previous projection to 3.3x -- 3.5x over the next 12-18 months.

In addition, in light of weak coal prices and slowing economic growth, the downside risk to BUMA's adjusted leverage worsening beyond Moody's current expectations is elevated, particularly if coal miners cut back on production volumes this year.

The lost contract with Kideco further exacerbates customer concentration and contract renewal risk for BUMA, which has another large near-term contract expiry.

BUMA's contract with its largest customer Berau Coal (P.T.) at Berau's Binungan coal mine, which Moody's estimates contributes to around 20% of BUMA's annual overburden removal volumes, expires in December 2020. BUMA's ratings will be downgraded if it fails to renew this contract or renews the contract at substantially lower rates or contracted volumes.

Furthermore, the loss of the Kideco contract increases BUMA's customer concentration risk as it is now more dependent on its two largest customers, Berau (Lati and Binungan mines) and Adaro Indonesia (P.T.) (Ba1 stable), which contributed to 48% and 11% of BUMA's consolidated revenues in 2019, respectively.

Also, while BUMA's mining operations have not yet been materially impacted by the coronavirus outbreak, its earnings and cash flow could experience considerable volatility in the event of temporary closures at multiple mine sites.

Thus far, only one of BUMA's customers Bayan Resources Tbk (P.T.) (Ba3 stable) announced on 27 March that operations at its Tabang mines would be temporarily suspended through the end of April. BUMA expects to make up for the lost volume later in the year.

Moody's expects BUMA's liquidity will remain weak, with BUMA's internal cash sources being insufficient to meet its cash needs over the next 12-18 months. The company has also fully drawn down its bank loan facilities.

BUMA has some flexibility in terms of cutting back on capital spending to preserve liquidity, or funding capital spending through new finance leases. However, its limited liquidity buffer reduces its ability to withstand a protracted downturn in coal demand and prices. BUMA's rating will likely be downgraded if its liquidity weakens further over the next three to six months.

The rating also considers BUMA's exposure to environmental, social and governance (ESG) risks as follows.

First, BUMA is exposed to elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries seek to reduce their reliance on coal power. This risk is somewhat mitigated by BUMA's customers supplying coal primarily to Asia, a region with growing energy demand.

Second, BUMA is also exposed to social risks associated with operating in the coal mining industry. To address these risks, BUMA conducts initiatives under its occupational health and safety systems, which pursue a zero-harm objective for workers. To strengthen community relations, BUMA also implements programs to improve education, living conditions and promote small local businesses.

Third, with respect to governance, BUMA's ownership is concentrated. The company is fully owned by PT Delta Dunia Makmur Tbk (Delta), an investment holding company listed on the Indonesia Stock Exchange. Delta, in turn, is 38% owned by an international consortium through Northstar Tambang Persada Ltd, comprising Northstar Equity Partners, TPG Capital, GIC Pte. Ltd. and China Investment Corporation.

Although the consortium has remained invested in BUMA since 2009, its longer-term strategy and investment horizon remain unclear. Financial investors typically have an investment horizon of five to 10 years, suggesting that the shareholder group could seek an exit over the life of BUMA's $350 million notes due in February 2022. (ends)