S&P: PT Bumi Resources downgraded to 'BB-'

(Singapore, Aug. 13, 2012) --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 'BB-' from 'BB'. The outlook is negative. At the same time, we lowered the rating on the company's guaranteed senior secured notes to 'BB-' from 'BB'. We also lowered our long-term ASEAN regional scale rating on Bumi to 'axBB' from 'axBB+'.

We downgraded Bumi because we expect the company's ratio of funds from operations (FFO) to debt to remain less than 12% over next 12 months because of its weak cash flows and still-high debt.

"We expect Bumi's debt to remain at about US$4.5 billion with an average cost of debt of more than 12% over the next 12 months at least," said Standard & Poor's credit analyst Vishal Kulkarni. "The company's plan to sell its non-coal assets to reduce debt could take time and will be subject to elements beyond its control, including market conditions and regulatory approvals. Bumi could use the payments of receivables from PT Recapital Asset Management and PT Bukit Mutiara to pay off debt, but these amounts will not be large enough to materially lower debt."

We believe Bumi's internal cash flows, the company's most likely source of funds for repaying debt, will be limited over the next 12-18 months. This is predominantly because of still-high production and financing costs and a slower-than-expected growth in production. Bumi's gross profit per ton is broadly in line with our expectations, despite the fall in coal prices since the beginning of 2012 and still-high mining, fuel, and mining contractor costs. The company's gross profit per ton of coal sold declined to US$33 in the first quarter of 2012 as we had expected, from US$39 in 2011.

The company's financial metrics are weaker than those of similarly rated peers. We assess Bumi's liquidity as "adequate," as defined by our criteria. We expect the company's sources of funds to exceed its uses by more than 1.5x in 2012, and be less than 1.0x in 2013.

"The negative outlook reflects our expectation that Bumi's financial performance is likely to remain stretched for the rating over the next 12 months in the absence of timely and meaningful debt reduction," said Mr. Kulkarni. We believe that lower-than-expected production and profitability will exacerbate the effects of the high interest burden on Bumi's cash flows over the next 18 months at least.

Our expectation that Bumi's ratio of FFO to debt will not significantly improve in the next 12 months is a key consideration for a possible downgrade. We could downgrade Bumi if the company fails to reduce debt by at least US$500 million (excluding accrued redemption premiums). We could also lower the rating if the company engages in inter-company or related-party transactions that weaken its cash generation capacity.

We could revise the outlook to stable if Bumi's capital structure and cash flow improve significantly. We believe this could happen if the company reduces debt by US$500 million or more and if production growth and profitability are better than we currently expect. The outlook revision assumes that Bumi uses its cash flow from any asset sales as well as its free operating cash flow to reduce debt. (ends)