Release: Moody's upgrades Adaro to Ba2; stable outlook
Tuesday, January 29 2008 - 11:29 AM WIB
"The upgrade recognizes Adaro's improving fundamentals driven by continued deleveraging of the balance sheet, significantly lower cost of capital, ongoing operational efficiencies, and the ability to lock in customers for substantial proportions of forward production for the next 3 years," says Laura Acres, a Moody's Vice President.
Moody's also notes that Adaro has materially altered it debt structure post redemption of its US$400 million bond facility and other debts (all ahead of the scheduled maturities) in December 2007. As a result of the refinancing concluded in December 2007, the company has significantly reduced its cost of borrowings, resulting in lower debt service obligation. The company now operates under one unsecured syndicated facility which provides flexibility to the Company to implement its growth strategy and to declare dividends (limited to 50% of annual Net Income). The company's projected key credit metrics in the next 2 years -- in particular, adjusted debt/EBITDA and EBIT/interest - support a higher rating at the Ba2 level.
Adaro's rating further reflects it's status as one of the world's lowest-cost producers and exporters of coal, with a long concession life (to 2022); the quality of its customer base, as represented by large utilities with excellent payment records; and its well established operations, with a record of consistent production growth.
At the same time, the rating recognizes key challenges such as: 1) exposure to commodity cycles for both coal sales and fuel procurement; 2) moderate degree of financial leverage as a consequence of the LBO in 2005; and 3) a lack of diversification given Adaro's single site and product.
The stable outlook reflects our expectation that Adaro will continue to maintain its operating and financial profile consistent with the Ba2 rating.
The rating could experience upward pressure if Adaro continues to demonstrate an ongoing ability to delever the business. Indicators that Moody's would look for include (CFO-dividends)/adjusted debt rising above 20% on a consistent basis and adjusted debt/capitalization falling below 60%:
Downward pressure on the rating could arise should Adaro experience material disruption to its operations, or industry fundamentals deteriorate to the extent that Adaro's ability to service its debt is compromised. Indicators Moody's would consider include debt service coverage falling below 2.0x or adjusted debt/capitalization rising above 75%. Furthermore, while cognizant of the need to return monies to shareholders, Moody's would look for financial metrics to remain in line with the rating level as such (CFO-dividends)/adjusted debt falling below 15% may also prompt negative rating action.
Other negative rating trends include: 1) event risk as a result of the courts deciding against Adaro on off-setting VAT payments; and 2) any change in laws and regulations, particularly on the mining concessions, that would affect the business.
Adaro is one of the largest single site coal producers in the southern hemisphere and one of the world's largest sub-bituminous coal companies. It exports 70% of its products to the Asia Pacific region, the US and Europe, while the rest is for the domestic market.
Adaro is owned 36% by a group of international investors including Goldman Sachs, Citigroup, Farallon Capital, GIC of Singapore and the Kuok Group, remaining shares are held by Indonesian investors including the Edwin Soeryadjaya group (32%) and Theodore Rachmat group (32%). (end of release)