S&P: Berau Energy's proposed U.S. dollar senior secured notes rated 'BB-', on CreditWatch negative

(July 25, 2014)--Standard & Poor's Ratings Services today assigned its 'BB-' long-term issue rating to a proposed U.S.-dollar issue of up to US$450 million in senior secured notes by Berau Capital Resources II Pte. Ltd., a special purpose vehicle of PT Berau Coal Energy Tbk. (Berau Energy: BB-/Watch Neg/--; axBB/Watch Neg). Berau Energy and its main operating subsidiaries, including its main cash-generating subsidiary PT Berau Coal Indonesia, unconditionally and irrevocably guarantee the notes. The rating on the notes is on CreditWatch with negative implications to reflect the rating on Berau Energy.

The rating on the proposed notes is subject to our review of the final issuance documentation, and confirmation of the amount, tenor, use of proceeds, and terms of the notes. The notes are secured by first-priority liens on Berau Energy's debt and interest reserve accounts and the shares of the subsidiary guarantors, including PT Berau Coal. Berau Energy expects to use the proceeds from the proposed notes to repay US$450 million of senior secured notes maturing in July 2015.

The notes will rank pari passu with US$500 million in senior secured notes due 2017 that Berau Energy issued in 2012. The cash and accounts management agreement dated July 20, 2010, governs the bank accounts of Berau Energy and PT Berau Coal, and will remain in place following the issue of the proposed notes. The agreement acts as a cash waterfall that allocates proceeds from coal sales to different reserve accounts, including tax reserve, operating expense, operating reserve, debt service, and distribution accounts. We note that an increase in Mr. Samin Tan's stake in Asia Resources Minerals PLC (ARMS, which owns 84.74% of Berau Energy) above 50% would not trigger a change of control clause under the notes. Mr. Tan currently owns about 47.5% in ARMS.

The 'BB-' corporate credit rating on Berau Energy reflects the Indonesian coal producer's mineral, customer and single-mine concentration risks, regulatory uncertainty, its aggressive capital structure, and thin cash flows. Berau Energy's good record of production growth, fair cost profile, strong liquidity, and currently manageable capital spending profile partially offset these weaknesses.

On June 24, 2014, we placed our ratings on Berau Energy on CreditWatch with negative implications because of a lack of clarity on the financial policies of ARMS after Mr. Tan's holding in the company increased to 47.5%, compared with 23.8% at the end of February 2014. We intend to resolve the CreditWatch placement within three months after getting more clarity on the financial policies and intentions of ARMS and assessing the progress in refinancing the US$450 million in notes maturing in July 2015.

We may downgrade Berau Energy by up to two notches, even if the company can refinance the notes and maintain ample liquidity, if: (1) we believe that the future financial policies of the company or its parent could weaken its liquidity or its credit profile because of higher capital spending or other related party transactions; or (2) we assess the group credit profile has deteriorated. We may also lower the rating on Berau Energy if the refinancing is materially delayed. (ends)