S&P: PT Bumi Resources Rating Lowered To 'CCC' On Rising Refinancing Risk; Outlook Negative

(SINGAPORE (S&P Global Ratings) Oct. 5, 2021)--S&P Global Ratings today took the rating actions listed above. Despite favorable coal prices, Bumi's coal mining subsidiaries are unlikely to be able to efficiently send dividends upstream in 2021 and 2022.

PT Kaltim Prima Coal (KPC), Bumi's 51%-owned subsidiary and its main dividend contributor, has paid dividends of only US$42 million to Bumi in the first half of 2021 although it reported US$254 million in EBITDA, a 67% increase from first-half 2020. At the same time, KPC reported US$263 million of cash, of which about US$124 million was trapped under a cash distribution agreement account. It further earmarked US$137 million for royalty payments and amounts to be set aside for mine closures. PT Arutmin Indonesia (Arutmin; 91% owned), on the other hand, did not pay dividends to Bumi in the first half of 2021 despite having US$93 million in cash and US$68 million in EBITDA.

In addition to operating and royalty expenses that hinder the subsidiaries' dividends payment, any dividends sent upstream to Bumi are subject to US$35 million-US$40 million in annual expenses at the holding company level before being released for debt servicing. This mechanism further curtails cash flow available for debt servicing.

We have long held the view that Bumi's capital structure is unsustainable, given that the amount of accruing interest far outweighs the cash-generating capacity of its subsidiaries.

Bumi's debt servicing in the past four years has not put a dent in its indebtedness. As of June 30, 2021, the company's debt totaled about US$2.6 billion, of which US$1.8 billion was in three tranches--A, B, and C--ranked by seniority. This amount is notably higher than the US$1.7 billion of total debt after Bumi's most recent debt restructuring in 2017.

While the company has repaid US$204.6 million of tranche-A debt since 2017, annual accrued interests of US$80 million-US$90 million on tranche-B and tranche-C debts have accumulated, given insufficient cash flows remaining after debt-servicing of tranche-A debt. The company also has mandatory convertible debentures (MCBs) of US$562 million.

We believe Bumi faces insurmountable debt maturities over the next 12-15 months and will have limited refinancing options.

The company needs to refinance nearly US$1.2 billion in tranche-A and tranche-B debt by December 2022. This amount is significant compared with the limited dividend receipts and cash available for debt repayment. Bumi has a limited ability to tap a wide range of traditional funding avenues, such as domestic or foreign capital markets. This is because of debt restructurings in the past decade, the group's complex and inefficient corporate structure, and governance factors. Moreover, as stipulated by the existing cash waterfall agreement, any new debt that Bumi raises should be subordinated to existing debtholders.

The company's significant existing debt further complicates its refinancing prospects, in our view. The company has about 15 months before the maturity of US$1.2 billion in debts, limited refinancing options, and high uncertainty over future dividends from the operating subsidiaries. We therefore see a growing likelihood that the company would restructure its debt; otherwise, it would be unable to fully meet its obligations.

Bumi's refinancing effort could also be hindered by risks associated with the company's MCBs. The company intends to convert all of the outstanding MCBs to ordinary shares before it is able to address its upcoming maturities. However, the pace of conversion has been slow, in our view. As of June 30, 2021, Bumi has converted US$63.1 million in MCBs, or 10% of US$630.6 million principal, and received requests for conversion for a further US$136.5 million, or 21.6% of the principal.

Moreover, the issuance of Series-C shares will need shareholders' approval. The next general shareholders' meeting is slated for November 2021, subject to the regulator's approval of the agenda. Any delay in the MCBs conversion process would leave Bumi with little time to refinance its maturing debts.

The negative outlook reflects the rising refinancing risk on Bumi's tranche-A and tranche-B debt and the growing likelihood that the company is unable to meet its obligations and would pursue a debt restructuring over the next 12-15 months.

Downside scenario

We would lower the rating on Bumi in the absence of considerable debt repayment as the maturity of tranche-A and tranche-B debts approaches. We would also lower the rating if the company undertakes a debt transaction at below par, which we would consider to be tantamount to a distressed exchange.

Upside scenario

The upside scenario is remote, given the company's unsustainable capital structure and cash leakage at the subsidiaries. We would revise the outlook to stable if Bumi is able and willing to fully repay or refinance its debt obligations over the next 12 months.

Bumi is an Indonesian holding company with majority interest in two key coal mining companies, KPC (51%) and Arutmin (90%). Bumi's cash flow comes only in the form of dividend payments from the two companies. The mining assets are located in Kalimantan, Indonesia. Combined gross production of thermal coal is 80-85 million tons per annum (mtpa), making Bumi one of the largest thermal coal producers and seaborne exporters globally. Apart from thermal coal, Bumi holds varying stakes in a few base metal mining assets, all of which are in the exploration stage. (ends)