Release: Moody assigns KPC rating
Tuesday, September 14 2004 - 12:15 AM WIB
At the same time, Moody's has assigned the company a Ba2 local currency senior implied rating and downgraded its local currency issuer rating to Ba3 from Ba2 with a positive outlook. The rating adjustment to the Ba3 local currency issuer rating reflects the risk of legal subordination to the secured bank debt. Moody's has also withdrawn KPC's Ba3 foreign currency unsecured debt rating, following the company's decision not to proceed with a planned USD bond issuance.
The Ba2 foreign currency secured debt rating reflects the rating agency's view that the facility will primarily be supported by the KPC's operating cash flow with a waterfall structure prioritizing loan repayments. Furthermore, the underlying security includes the assignment of sales contracts - of which over 90% are generated overseas with receipts in U.S. dollars - and the buyers of these sales will be given irrevocable payment instructions to pay directly to offshore-held accounts pledged to the secured lenders. However, Moody's notes that most of these sales contract assignments and irrevocable payment instructions are subject to the acknowledgement or consent of the buyers for security perfection under offshore law.
The facility is also secured by a pledge of 81.6% of KPC's share capital as well as by the shares of holding companies controlling KPC - and has restrictive covenants, including negative pledge, no additional indebtedness, except up to US$30 million in unsecured debt and restriction on divestment proceeds of shares (if any) in KPC by PT Bumi Resources TBK for the bank loan prepayment. The facility will be amortized by 10 quarterly installments of 10% of its total amount and matures in around 2007.
The Ba2 foreign currency secured debt rating incorporates all the above factors and adds convertibility risk, which is the likelihood of the government declaring a debt moratorium to counter a foreign currency crisis. As such, KPC's foreign currency rating is a function of its own risk of default (as indicated by its local currency rating), the probability of an Indonesian government default on its foreign debt (implied by its B2 rating), the likelihood that the government would declare a moratorium in the event of a default and, if it did, the chances that it would exempt a company such as KPC.
Moody's says the Ba2 local currency senior implied rating reflects KPC's substantial reserves base and position as one of the world's lowest cost producers of thermal coal. The rating also recognizes the company's production track record of more than 10 years, the favorable environment expected for thermal coal over the next 12-24 months, and Moody's expectation of continued free cash flow generation over at least the medium term.
At the same time, the rating considers KPC's current high financial leverage - reflected in its Debt/Capital ratio of 64% at December 2003 - the risks related to its plan to substantially raise production over the next few years, uncertainty regarding its immediate and ultimate ownership structure, its exposure to a single commodity, and the economic uncertainty associated with Indonesia.
The positive ratings outlook reflects Moody's expectation that KPC's rapid de-leverage will significantly improve its financial flexibility, which will further benefit from substantial production growth, as well as favorable coal prices over the near to medium term. The local currency ratings will experience upward pressure if KPC continues to de-leverage and demonstrates its willingness to maintain conservative financial leverage on a sustainable basis.
PT Kaltim Prima Coal, headquartered in Jakarta, operates one of the world's largest thermal coal mines in East Kalimantan, Indonesia. Production in 2003 was 16.2 million tons and sales revenue for the year ending Dec. 31, 2003, was approximately US$415 million.
PT Bumi Resources TBK, which is a publicly listed company in Indonesia and the ultimate parent of KPC, is 52% owned by Long Haul Holdings Ltd., an entity controlled by the Bakrie family, which has various business interests, including telecommunications, banking, oil and gas and plantations.(*)