Release: Standard & Poor's: KPC rating raised to 'BB-' From 'B+'; outlook stable
Tuesday, December 6 2005 - 11:48 PM WIB
"The upgrade reflects KPC's gradually improving financial profile on the expectation that it will be fairly insulated from volatility in coal prices because at least 80% of its coal sales will go to IndoCoal Resources at a fixed price of US$34.30 per ton," said Standard & Poor's credit analyst Nancy Koh. Coupled with its ability in sustaining export sales, Standard & Poor's projects that the company's funds from operations to debt and debt to EBITDA ratios will improve to above 30% and less than 1.6x, respectively, for fiscal 2005 through 2007, from 32% and 2.8x in the past three years.
The projections are based on the pro forma consolidated financials of KPC and sister company, PT Arutmin Indonesia.
KPC, which is Indonesia's second-largest coal mining company, is also expected to benefit from lower interest costs following the refinancing of US$385 million of bank debt. Given that KPC's ability to incur additional debt will be restricted by certain covenants in the notes issue for IndoCoal, a special purpose vehicle (SPV), this should help to instill some financial discipline within the company.
The rating also takes into consideration a degree of insulation from sovereign debt risks. Standard & Poor's is of the view that despite its own difficulties, the Indonesian government in recent years has not sought to impose a debt moratorium or interfere with local companies accessing foreign exchange markets to service their foreign debt. More than 90% of KPC's revenues are in U.S. dollars, providing a natural hedge against its borrowings and costs (which are largely denominated or linked to U.S. dollars). KPC's exposure to the weak Indonesian banking system is also minimal, as a majority of the company's sales revenues and cash are deposited in offshore bank accounts in Singapore.
However, the rating on KPC is constrained by operating, industry, and regulatory risks, and the company's affiliation with the Bakrie Group. Standard & Poor's is concerned that Bakrie could adopt an aggressive financial policy, as demonstrated in the past, to the detriment of KPC's credit profile.
However, this risk could be partially mitigated by certain covenants in the notes issue that restrict KPC's ability to incur additional debt. As such, this limits the likelihood of KPC being used as a funding vehicle for parent company PT Bumi Resources Tbk, which is controlled by the Bakrie Group.
KPC's liquidity is deemed adequate. Although the company's cash and cash equivalent of US$72.7 million at March 31, 2005, was insufficient to cover short-term debts of US$154 million, it has since refinanced its bank borrowings. Total debt outstanding was US$316 million as of August 2005.
The stable outlook reflects our expectation that KPC will maintain its market position and sustain export sales. Over the medium term, the credit profile should be supported by strong demand for coal, the company's low-cost operations, and increased production from existing and new coal pits. The outlook also reflects the expectation that KPC will continue to benefit from the arrangement to sell its coal to the SPV at a floor price set under the US$600 million securitized notes document, and have continued access to the intercompany funds.
Conversely, the rating will be lowered if the company's financial profile weakens substantially as a result of the floor price sales arrangement, or if failure by IndoCoal to pay KPC for its coal causes a liquidity crunch.(end of release)