Release: Fitch upgrades Indika's IDRs to 'B+'; Outlook stable

Fitch Ratings-Jakarta/Singapore-21 October 2009: Fitch Ratings has today upgraded PT Indika Energy Tbk's (Indika) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'B'. The Outlook is Stable. Fitch has also upgraded the senior unsecured rating of the USD250m senior notes due in 2012 issued by Indo Integrated Energy B.V. and guaranteed by Indika and its 100%-owned subsidiary PT Indika Inti Corpindo (IIC) to 'B+' from 'B' with a recovery rating of 'RR4'.

At the same time, the agency has assigned an expected issue rating of 'B+' and an expected recovery rating of 'RR4' to the proposed US dollar fixed-rate senior notes to be issued by Indo Integrated Energy II B.V. and guaranteed by Indika and IIC. The final rating is contingent upon receipt of documents conforming to information already received.

The upgrades reflect the fact that the dividend flows from Indika's 46%-owned associate, PT Kideco Jaya Agung (Kideco) - the third-largest coal producer in Indonesia - rose significantly to USD210m in 2008 (paid in 2009) from USD90m in 2007 (paid in 2008). Fitch expects that the flows will remain strong and steady due to the prevailing high coal prices and Kideco's production ramp-up plan of raising its coal production to 31 million metric tones (MT) by end-2011 (2008: 22 million MT).

The ratings, however, continue to be constrained by Indika's status as an investment holding company that derives most of its cash inflow in the form of dividends from Kideco. This constraint is partially mitigated by the existence of an agreement between the shareholders of Kideco that ensures that virtually all free cash flows of Kideco are distributed as dividends and the fact that Kideco is debt-free.

The upgrades have also taken into account the recently acquired PT Petrosea Tbk (Petrosea) - an engineering and construction contractor with mining capabilities - which complements Indika's existing businesses. The relatively steady cash flows from Petrosea's longer tenor contracts (typically five years) partly mitigate the volatility relating to Indika's other major business - 100%-owned subsidiary, Tripatra Group (Tripatra), which is involved in the Engineering, Procurement and Construction (EPC) and Operations and Maintenance (O&M) businesses, especially in the volatile oil and gas (O&G) sectors.

Indika had a cash balance of IDR 2.5trn (excluding short-term investments and restricted cash) as at end June 2009. The issuance of the proposed notes will further add to this balance. Management's stated goal is to expand in the energy sector, and Fitch expects that some of this cash will be used for acquisitions in the sector. Indika's adjusted EBITDAR - to include dividend flows from Kideco - provided a 3.1x coverage of its gross interest in 2008.

The Stable Outlook reflects Fitch's expectation that Indika is likely to maintain its credit metrics given its increasing cash flows, despite incurring new debt. Indika's financial profile may weaken if the dividend flow from Kideco unexpectedly falls, new investments produce weak returns and/or Tripatra and Petrosea fail to generate new businesses. Any large investment in an energy asset that is non cash generating or increases cash flow volatility may weaken Indika's business profile.

A weakening of Indika's business and/or financial profiles - especially if net adjusted leverage (as measured by net adjusted debt/Adjusted EBITDAR) rises above 2x - may result in a negative rating action. Given Indika's subordination to Kideco's cash flows, Fitch does not envisage a positive rating action over the next 18 to 24 months. (end of release)