S&P: PT Bumi Resources downgraded to 'B' on likely weaker cash flow

(Jan. 17, 2013) -- Standard & Poor's Ratings Services said today that it had lowered its long-term corporate credit rating on Indonesia-based thermal coal producer PT Bumi Resources Tbk. (Bumi) to 'B' from 'B+'. At the same time, Standard & Poor's lowered the rating on the company's guaranteed senior secured notes to 'B' from 'B+'.

"We also lowered our long-term ASEAN regional scale rating on Bumi to 'axB+' from 'axBB-'. The ratings remain on CreditWatch, where they were placed with negative implications on Sept. 26, 2012. We downgraded Bumi because we expect the company's cash flow to be weaker in 2013 than we had anticipated. We expect Bumi's ratio of funds from operations to debt to be below 5% over the next 12 months," said Standard & Poor's credit analyst Vishal Kulkarni.

"We have revised our assessment of the company's financial risk profile to 'highly leveraged' from 'aggressive.'

We lowered our forecast of Bumi's gross profit per ton of coal sold (excluding depreciation) to US$20-US$23 from US$28-US$32. We expect coal prices to remain low and the company to sell a higher volume of low-quality coal. This will more than offset a likely improvement in Bumi's cash costs from its expected lower stripping ratios (the ratio of soil removed to obtain a ton of mineral). In our base case for 2013, we expect gross coal production at Bumi's coal companies at 80 million ton, Bumi's EBITDA at US$700 million-US$800 million, its debt at above US$4.5 billion, and its cash interest costs at about US$450 million.

Bumi's high interest and tax outgoings are likely to continue to erode its debt-servicing cushion. We anticipate that the company's funds from operations to interest coverage will average 1x-1.5x over the next two to three quarters. Nevertheless, we believe Bumi's inventory at the end of 2012 provides some buffer if production growth trails our expectation.

We do not expect Bumi to meaningfully reduce debt in 2013 because the company's ability and willingness to sell assets to repay debt is untested. We assess Bumi's management and governance as "weak," as defined in our criteria. We believe the company's financial management is very aggressive, reflected in its appetite to maintain high leverage. This weakness overshadows the satisfactory underlying operational and financial management at the coal companies, reflected in their track record of modest production growth and sustained cash flow generation.

We expect Bumi to refinance about US$570 million debt in 2013, including about US$330 million at Bumi's subsidiary PT Bumi Resources Minerals Tbk. Of the maturing debt, US$485 million is with a single bank with which Bumi has a long-term relationship. This link will help Bumi focus its refinancing negotiations and reduce the risk of refinancing delays. We note that Bumi's financial covenants restrict its ability to borrow additional debt, except to repay existing debt.

We kept the ratings on CreditWatch because Bumi could face difficulty in refinancing debt maturing in 2013," said Mr. Kulkarni. "This is because of an ongoing investigation by Bumi's 29.5% shareholder Bumi PLC into potential financial irregularities at Bumi and continued shareholder disagreements have weakened Bumi's access to capital.

We aim to resolve the CreditWatch when Bumi refinances its debt maturities that are due in the third quarter of 2013.

We could lower the rating if Bumi does not complete its refinancing by May 2013." (ends)