Moody's upgrades Berau rating to B1, outlook stable
Friday, May 13 2011 - 01:57 AM WIB
Moody's has also upgraded to B1 from B2 its senior secured bond rating on the USD450 million five-year notes issued by Berau Capital Resources Pte Ltd, which is wholly owned by PT Berau Coal Energy (BCE), the parent of Berau. The notes are guaranteed by BCE and its subsidiaries, which includes Berau.
The outlook for all these ratings is stable.
RATINGS RATIONALE
"The upgrade reflects Berau's strong operating performance and improved financial metrics, driven primarily by lower adjusted debt, resulting in adjusted debt/EBITDA falling to 2.2x by end-2010," says Simon Wong, a Moody's Vice President and Senior Analyst.
In 2010, PT Bukit Mutiara, BCE, and Berau, paid off USD580 million in vendor notes, as well as a USD300 million subordinated loan and a USD300 million bank loan, decreasing the group's adjusted consolidated debt by USD1.18 billion, to USD817 million at 31 December 2010.
The B1 ratings also reflect Berau's status as one of the world's lowest-cost producers and exporters of coal, a track record of consistent production growth, and the quality of its customer base, which comprise large utilities with excellent payment records.
"While Moody's expects Berau to deleverage further over the next 12 to 18 months, Moody's would like to see a period of stability and consistency in the ownership as well as increased clarity in Vallar PLC's financial policy and overall strategic direction for Berau," says Wong, who is also lead analyst for Berau.
"Berau has seen its controlling shareholder changed three times over the past 18 months and experienced volatility in its adjusted leverage over the same period."
Berau (through BCE) is now consolidated with Vallar PLC, which is currently debt-free, subject to the more stringent corporate governance standards of the London Stock Exchange, and has better access to the international capital markets.
However, Vallar PLC has a rather short operating history and its future operations and financial strategy for the group could have a material impact on Berau and BCE's capital structure.
The ratings also considers the company's lack of diversification (given its single concession and product), its exposure to commodity cycles, and the uncertainty in the regulatory environment, as well as the high level of concentration risk, as its top ten customers account for approximately 75% of revenues.
The stable outlook reflects Moody's expectations that Berau will successfully implement its business plan and maintain its competitiveness in the near to medium term.
Upward rating pressure may emerge if Berau expands its production capacity as planned, while maintaining the current prudent financial profile at both its and BCE's levels. Moody's would also like to see a track record of stability in Berau's financial profile and clarity of its strategic direction under the new ownership.
Downward pressure on the rating could emerge if industry fundamentals deteriorate, leading to a decline in free cash flow that constrains Berau's ability to make its scheduled debt payments at the holding company level. Indicators Moody's would consider include adjusted consolidated debt/EBITDA rising above 4.0x or adjusted consolidated EBIT/interest expense falling below 2.5x.
Other negative rating triggers include 1) a material change in Vallar PLC's financial policy, resulting in deterioration to BCE or Berau's capital structure; 2) any adverse decision regarding the off-setting of VAT payments; or 3) any change in laws and regulations, particularly with regard to the mining concessions, that would adversely affect the business.
The principal methodology used in rating Berau was Moody's Global Mining Industry, published in May 2009.
Vallar PLC completed its acquisition of a 75% stake in BCE in April 2011, and PT Recapital Advisors -- through Mutiara -- owns 20.4% of Vallar's voting share capital as well as 13.2% of Vallar PLC's issued share capital. Mutiara received USD739 million in cash for the transaction, which was used to pay down a substantial portion of Mutiara's debt. Vallar PLC is required under the Indonesian stock exchange rules to make a mandatory cash offer and purchase up to 9.74% of BCE shares.
The change of control clause has triggered a tender offer to buy back the senior secured bond, although the offer lapsed on 31 March 2011, with no redemption as the market price was above the redemption price.
Bakrie & Brothers, which currently own 54.6% of Vallar PLC's issued share capital, has pledged a majority of its shares as collateral to a loan to Bakrie & Brothers.
Berau is Indonesia's fifth-largest producer and exporter of thermal coal. It operates three active mines (Lati, Sambarata, and Binungan) at a single site in East Kalimantan. It had estimated resources of 1.4 billion tons, and probable and proven reserves estimated at 346 million tons at 31 December 2009.
REGULATORY DISCLOSURES
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