Standard & Poor's: ANTAM outlook revised to stable from developing; 'B-' ratings affirmed

(March 30, 2015) -- Standard & Poor's Ratings Services said today that it had revised its outlook on PT ANTAM (Persero) Tbk. (ANTAM) to stable from developing. At the same time, we affirmed our 'B-' long-term corporate credit rating and our 'axB' long-term ASEAN regional scale rating on the company. ANTAM is an Indonesia-based diversified metals and mining company in which the Indonesian government has a majority stake.

"We revised our outlook on ANTAM because we believe that the company will face no material liquidity pressure over the next 12 months because of its sizable cash balance, good buffer under financial covenants, and improved diversity in banking relationships," said Standard & Poor's credit analyst Xavier Jean.

We expect ANTAM to maintain an EBITDA interest coverage of about 1.5x over the next 18-24 months because of the improved scale and profitability of the company's ferronickel operations, and the ramp-up of the chemical grade alumina operations. As a result, we do not envisage a payment crisis or default scenario over the period.

In our view, ANTAM's sizable cash balance of about Indonesian rupiah (IDR) 2.62 trillion as of Dec. 31, 2014, provides good headroom under the debt service coverage covenants of the company's bank loans. The cash balance also reduces the risk of an acceleration in repayment of ANTAM's bank loans because of a covenant breach.

We believe the Indonesian government is committed to maintaining a ban on exports of unprocessed mineral ores to stimulate investment in smelting capacity. This ban will remain a substantial drag on ANTAM's profitability because the company is unable to export profitable nickel ore. However, we still expect the company's operating and financial performance to improve in 2015, compared with 2014. We anticipate stronger profitability in ferronickel operations because of a decline in oil prices (a major cost component), and the company's expanded scale and efficiency measures.

We understand from news reports that certain state-owned companies in Indonesia, including ANTAM, may receive cash injections from the government before the end of 2015 to support investment and partly fund greenfield projects. In our view, the cash injection would be mostly credit neutral for ANTAM, if it materializes. This is because the company is likely to spend on large-scale and long-dated expansion of smelting capacity rather than on repaying debt or improving liquidity.

"We affirmed our rating because we anticipate that ANTAM will continue to have high leverage through 2016 at least," said Mr. Jean. "We forecast the ratio of debt to EBITDA to remain well in excess of 5.0x over the next two years because of the ban on nickel ore exports, a major contributor to the company's EBITDA and cash flows."

At the same time, we still expect negative free operating cash flows in 2015 and 2016, given ANTAM's still-high capital spending on asset modernization and cash injections into subsidiaries or joint ventures.

We view ANTAM's high single-asset concentration risks following the export ban, high product concentration to nickel, and structurally weaker cost position in ferronickel operations as major constraints to its "vulnerable" business risk profile. These factors underpin the company's 'b-' stand-alone credit profile. We do not factor explicit government support in our rating on ANTAM, given the increasing role of the private sector in Indonesia's metals and mining sector.

We could lower the rating if we expect ANTAM's liquidity to deteriorate. ANTAM's cash balance declining below IDR750 billion, the company's inability to roll over its working capital maturities, or a covenant breach would indicate such weakness.

We could also lower the rating if we perceive that ANTAM's capital structure is unsustainable. The company's EBITDA interest coverage falling to about 1.0x for more than 12 months with no prospect of improvement could trigger a downgrade. A sharp decline in nickel prices or ANTAM's further debt-funded capital spending could lower the EBITDA interest coverage.

A rating upgrade is unlikely over the next 12 months, given our expectation that the company will have a "highly leveraged" financial risk profile, with limited prospects for debt reduction.

Nevertheless, we could raise the rating if ANTAM's ratio of debt to EBITDA improves below 5.0x, its EBITDA coverage stays sustainably above 2.0x, and its liquidity stabilizes because of higher cash flows, reduced short-term debt, lower capital spending, or a combination of the three. We believe nickel prices averaging more than US$8.5 per pound on a sustainable basis, as well as the application of discretionary cash flows to debt reduction is necessary for such improvement.

We could also raise the rating if we assess that the likelihood of the extraordinary government support to the company has increased. An upgrade would also be contingent upon better clarity around ANTAM's capital spending, especially on its Halmahera Timur ferronickel project, and the funding policy for such expansion projects. (ends)