Release: Moody's rates PT Adaro Indonesia (P) Baa3
Wednesday, November 23 2005 - 12:09 AM WIB
The proceeds of the bonds, together with a proposed 4-year amortising senior secured bank debt of US$250 mln (the "senior bank debt"), will be primarily used to refinance existing secured bank debt and repay a portion of the mezzanine financing. Such debts have been incurred to finance the shareholder acquisition of Adaro, IBT and another related group company. Moody's expects to affirm the ratings and remove them from provisional status upon the closing of both the proposed bonds and the senior bank debt.
The P(Ba3) local currency corporate family rating reflects Adaro's substantial coal reserve base in Indonesia, good operating history, competitive low cost position, experienced management team and solid free cash flow generation, as well as the industry's favorable medium-term outlook.
At the same time, key challenges for the rating include Adaro's moderate financial leverage and refinancing risk for the proposed bonds, its single-product nature and site operations, and continued exposure to Indonesia's political and regulatory environment.
Moody's considers that Adaro has a consistent operating and production track record spanning the last 13 years. It has large available coal reserves at about 1,334 mln tons, which is equivalent to reserve life of 55 years based on 2004 production level. The company benefits from a competitive low cost position (3-year average cash operating costs of US$18/ton), and convenient access through IBT to terminal capacity provides it with competitive advantages over other exporting countries. Also, Adaro has a diversified customer base with more than 40 customers located in 17 countries with a 76% of the company's total revenue denominated in USD, helping mitigate currency risk.
This situation, together with its term sales contracts of 1 to 17 years, provides some cushion against the volatility inherent in coal prices. Furthermore, the good quality of Adaro's sub-bituminous "Envirocoal" is reflective of its products' ultra low ash and sulphur content. Given increasing awareness of emissions control from power plants, these are characteristics which translate into a rapidly growing market.
Moody's sees both Adaro and IBT maintaining modest capital expenditure requirements over the next 3 years, including an annual average of around US$13 mln, as they benefit from contractual arrangements with contract miners.
On the other hand, the rating considers the concentration risk arising from Adaro's single-product nature and single site operations. In addition, Adaro is heavily exposed to the Indonesian regulatory environment and operates under a 30-year coal cooperation agreement (CCA) with the government and which expires in 2022. However, the government is likely to remain supportive of the industry, given coal is classified as a strategic mineral resource and the CCA provides tax and foreign currency revenue via royalties from its entitlement of the coal produced.
Adaro's financial leverage is moderate for its rating level over the next 2-3 years with projected total debt/EBITDA of 3.1-3.6x (total debt is defined to include 100% of the mezzanine principal, which Moody's considers as more debt like instruments). The adjusted leverage would be higher if we included the long-term contract commitments with mining contractors. Moody's draw certain comfort that the company's expected positive free cash flow generation -- supported by its modest capital expenditure requirements, consistent production growth and a favorable industry outlook -- should enable it to de-leverage (through scheduled amortization of the senior bank debt) in the next 2-3 years.
The P(Ba3) foreign currency senior secured bond rating further reflects the proposed bonds' senior position in Adaro's capital structure. Both the senior bank debt and bonds are to be fully secured by all assets of, as well as corporate guarantees from Adaro and IBT. Both facilities will rank ahead of the existing 15-year US$350 mln mezzanine securities, which are subordinated guaranteed obligations by Adaro and IBT. The mezzanine securities cannot call default and accelerate the security while the senior debt is outstanding. In its analysis, Moody's classifies the mezzanine securities as Basket A (100% debt-like) hybrids, noting its subordinated status which provide a loss-absorption cushion for the proposed senior bonds and bank debt. Moody's says the senior secured bond rating is equivalent to the corporate family rating because the secured bank debt and the bonds represent a significant portion (63%) of Adaro and IBT's total debt.
The (P)Ba3 foreign currency bond rating incorporates all the above and adds convertibility risk, which is the likelihood that the government would declare a debt moratorium to counter a foreign currency crisis. As such, Adaro's foreign currency rating is a function of a) its own risk of default (as indicated by its local currency rating of Ba3), b) the probability of an Indonesian government default on its foreign debt (implied by its B2 rating), and c) the likelihood that the government would declare a moratorium given a default and, if it did, the chances that it would exempt a company such as Adaro. For details, please refer to Moody's Rating Methodology, "Piercing the Country Ceiling: An Update," January 2005.
Moody's notes that under the proposed bond structure, the combined cash flow of Adaro and IBT will be deposited into offshore (for USD sales receipt) and onshore (for IDR sales receipt) revenue collection accounts and utilized to service the senior debt first before the mezzanine, under a waterfall payment. Projected debt (senior) service coverage ratio (DSCR) is in the range of 1.3-1.7x for the next 2-3 years.
Despite the mezzanine debt being subordinated to the bonds, the waterfall arrangement allows available free cash flow from Adaro and IBT, after passing restricted payment tests, to service the interest of the mezzanine facility and to make early principal prepayment of the mezzanine facility. According to Moody's forecast, the bonds will need to be refinanced at maturity. However, the de-leveraged positions of Adaro and IBT, absent any unfavorable industry trend, should well position the company to refinance at that time.
The ratings could experience upward pressure if Adaro demonstrates its ability to further improve its free cash flow and speed up de-leverage such that DSCR increases to above 1.8x on a sustainable basis.
On the other hand, the ratings could exhibit downward pressure if Adaro experiences material disruption in its operation, or adverse industry fundamentals emerge, leading EBIT margin to deteriorate below 15%, and the company fails to grow production and implement de-leverage as planned, resulting in DSCR falls below 1.25x in 2006 and 1.5x in 2007.
Adaro, headquartered in Indonesia, operates one of the world's largest sub-bituminous coal mines in Kalimantan, Indonesia. The company's production in 2004 was 24.3 mln tons. IBT, headquartered in Indonesia, operates and manages a coal bulk terminal and port facilities in Pulau Laut, Kalimantan in Indonesia. Combined sales revenue for FY2004 was US$617.9 mln. Adaro is owned by a group of Indonesian and international investors including the Edwin Soeryadjaya group and Theodore Permadi Rachmat group, who together beneficially own 64% of the company. The balance is owned by international investors including Noonday Asset Management (a part of Farallon Capital), GIC of Singapore and Kerry Group.(end of release)