Standard & Poor's: Berau Coal rating lowered to 'CCC-' on proposed capital transaction
Wednesday, January 21 2015 - 11:07 AM WIB
We lowered the rating because Berau Energy's proposed capital transaction announced Jan. 20, 2015, would, in its current form, constitute a distressed exchange under our criteria. The company proposed an upfront pay-down of 5% of US$450 million in senior secured notes due July 2015 and an extension of the maturity of the remainder of the notes to February 2017. This is part of Berau Energy's strategy to improve its capital structure and maturity profile. This proposal remains subject to bondholders' approval.
The proposed plan contemplates a similar coupon of 12.5% but does not compensate for the 18-month maturity extension to February 2017, from July 2015 originally. The company also may elect to pay up to 5.25% of the 12.5% cash coupon rate in kind, subject to certain liquidity thresholds to be negotiated. The pay-in-kind component leads to a further risk that the payment of the original promise on the notes will be further delayed, or not be fulfilled, if the company's capital structure remains unsustainable. As a result of these proposed terms, we view the offer as a distressed exchange because we believe the terms are less than originally promised under the securities issued in 2010.
"Berau Energy has yet to gain bondholder acceptance for its proposed capital transaction, a process that could take several more weeks," said Standard & Poor's credit analyst Xavier Jean. "We also believe the terms and conditions of the final offer could differ from the proposed transaction following bondholder feedback. The likelihood of a default by Berau Energy on its financial obligations will increase substantially, in our opinion, if bondholders reject the capital transaction."
We have revised our assessment of the management and governance on Berau Energy to "weak" from "fair," given the uncertainty on the composition of management and the board at its majority shareholder, Asia Resource Minerals PLC, and its impact on the refinancing exercise.
The CreditWatch placement with negative implications reflects a one-in-two likelihood of a downgrade over the next three months, depending on the final terms and conditions of the proposed capital transaction and its acceptance by bondholders.
We would lower the rating to 'CC' if bondholders accept the transaction under the current terms because we view it as a distressed exchange under our criteria. We would then lower the rating to 'D' upon completion of the transaction. We could also lower the rating if bondholders do not approve the transaction and the company does not formulate another refinancing plan.
"We are likely to keep the rating on Berau Energy in the 'CCC' category in the next 12 to 18 months even if the company refinances under terms that we do not consider to form a distressed exchange," Mr. Jean said.
While a refinancing would relieve short-term liquidity pressure, we expect Berau Energy's capital structure to remain unsustainable at current coal price levels given its high debt and interest burden. We forecast the company's ratio of debt to EBITDA at more than 10x in 2015 and into 2016, on the basis of a gross profit per ton before depreciation and amortization of about US$5 in both years. It would take substantially stronger coal prices, with gross profit per ton closer to US$15, for the company's capital structure to become more sustainable. We view those conditions as unlikely over the next 12 months, given the oversupplied coal markets. (ends)