Standard & Poor's: Berau Coal Energy rating lowered to 'CCC+' on growing refinancing risk
Friday, November 7 2014 - 02:04 PM WIB
"We lowered the rating because we believe Berau Energy will face growing refinancing risk over the next few weeks," said Standard & Poor's credit analyst Xavier Jean.
The company has yet to publicly articulate a detailed strategy and time frame to refinance US$450 million in senior secured notes maturing in July 2015. In addition, a further slide in coal prices over the past few weeks will likely translate into materially more negative free operating cash flows than we earlier anticipated.
Berau Energy faces growing refinancing risk, in our view, because creditor sentiment has weakened following the lack of communication on the company's refinancing strategy. We believe the further decline in coal prices by about 7% since the beginning of October 2014 and the prospect of large negative free operating cash flows over the next two years at least will compound an already cautious market sentiment and could make refinancing through the debt capital markets or bank loan markets increasingly difficult and costly. If Berau Energy does not refinance its debt over the next few weeks, we believe the likelihood of a distressed exchange or a debt restructuring will increase.
On Nov. 4, 2014, Berau Energy's controlling holding company Asia Resources Minerals Plc. (ARMS) confirmed that Mr. Samin Tan has reduced his stake in ARMS to about 23.8% from about 47.5% previously. We believe it is too early to assess the impact the ownership change could have on Berau Energy's operating and financial strategies or on its corporate governance. But the change of ownership, coinciding with an important refinancing milestone, could further delay the execution of the company's funding plan.
"We believe Berau Energy's capital structure is becoming increasingly unsustainable because of persistently poor coal prices," said Mr. Jean.
We had expected a further decline in average selling prices to US$52-US$54 per ton in 2015 (from our forecast of about US$56 in 2014). But the recent price declines and continuing weak buyer sentiment could lead to realized prices falling below US$50 per ton in 2015. A pricing upside in 2016 also appears elusive at this stage because major Indonesian coal miners are still expanding production and reducing costs. Declining oil prices since July 2014 also offer a relief to the sector, in our view. Those factors combined will likely prevent coal prices from bottoming out in the next three months at least. Although Berau Energy implemented aggressive cost reductions, they are unlikely to mitigate the recent price weakness. In these conditions, we believe the company's debt-to-EBITDA ratio could stay well above 10x in 2015 and 2016, and its ratio of funds from operations to debt could remain negative in both years.
Berau Energy's sizable cash balance, which we forecast at about US$260 million-US$280 million as of year-end 2014, provides some buffer. Nevertheless, we estimate the recent price fall could increase the company's negative free operating cash flows to more than US$80 million in each of 2015 and 2016, which will deplete its cash balance more rapidly than we earlier anticipated. We estimate that a US$1 decline in Berau Energy's gross profit per ton translates into an additional US$10 million in cash outflow a year. Without refinancing, the cash balance will be insufficient to repay the US$450 million of notes in July 2015. As a result, we are revising our liquidity assessment on Berau Energy to "weak" from "less than adequate," as our criteria define the terms.
"The CreditWatch placement with negative implication reflects a one-in-two likelihood of a further downgrade over the next three months and the growing likelihood of a debt restructuring or a distressed exchange if the company fails to refinance its maturing notes," said Mr. Jean.
We could lower the rating by more than one notch if Berau Energy fails to refinance the notes within the next three months, or restructures the debt in a manner that we consider to be a distressed exchange.
We could affirm the ratings and resolve the CreditWatch if Berau Energy refinances the notes over the next three months and stabilizes its liquidity situation by reducing its negative free operating cash flows.
A completion of the refinancing in itself may not result in an upgrade in the near term, given our expectations of still-weak operating performance for at least the next 12 months. An upgrade would require an improvement in realized prices of at least US$10 per ton and an increase in gross profit per ton of at least US$7. We view those conditions as unlikely over the next 12 months given the oversupplied coal markets. (ends)