Standard & Poor's: PT Medco Energi's Proposed Senior Unsecured Notes Rated Preliminary 'B'

(SINGAPORE (S&P Global Ratings) April 23, 2019)--S&P Global Ratings today said it has assigned its preliminary 'B' long-term issue rating to a proposed issue of U.S. dollar-denominated senior unsecured notes guaranteed by PT Medco Energi Internasional Tbk. (Medco; B/Positive/--) and issued by its fully owned subsidiary Medco Oak Tree Pte. Ltd. The rating is subject to our review of the final issuance documentation.

Medco will use the proceeds from the proposed issuance to pay for the proposed acquisition of Ophir Energy PLC and relevant transaction costs. We already incorporate the effect of this issuance and the Ophir Energy acquisition in our ratings on Medco.

We equalize the rating on the notes with our 'B' issuer credit rating on Medco. The company's assets are located in Indonesia, a jurisdiction that we consider to have a weak rule of law, a lack of creditor-friendly features, and no consistency in the conformity of the distribution of proceeds to legal rankings of claims. Recovery prospects in the event of bankruptcy are uncertain in the country because of the weak jurisdictional context.

Our ratings are preliminary because the guarantee provided by the guarantor will only be effective once the notes issuance and acquisition of Ophir Energy close. Post notes issuance and before the Ophir Energy acquisition closes, the funds will stay in an escrow account and will be paid out to Ophir Energy shareholders on completion of the acquisition. If the acquisition fails to consummate after the notes are issued, the guarantor would undertake to repay the issued notes with redemption fee of 1% plus accrued interest. We expect to finalize the rating after the guarantee becomes effective and we have reviewed the final issuance documents.

Our positive outlook on Medco reflects the potential for an upgrade over the next nine to 12 months. This follows our expectation that the company's acquisition of Ophir Energy will add production scale and cash flows such that its ratio of funds from operations to debt exceeds 12% on a sustained basis. We could revise the outlook to stable if cash flow leverage does not improve to the extent we expect due to larger-than-expected growth in investments or production, or cash flows fail to match our estimates. (ends)