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Rating Action:

Moody's affirms Adaro's ratings at Ba1; outlook stable

08 May 2013

Singapore, May 08, 2013 -- Moody's Investors Service has affirmed the corporate family and senior unsecured bond rating of PT Adaro Indonesia (Adaro) at Ba1.

The outlook of the ratings is stable.

RATINGS RATIONALE

"The affirmation reflects Adaro's strong liquidity position, track record of prudent financial management, and our expectation that the company will focus on deleveraging such that its adjusted debt to EBITDA ratio will return to below 2-2.3x by end 2014," says Simon Wong, a Moody's Vice President and Senior Analyst.

"Its rating headroom, however, has narrowed due to the expected deterioration of its credit metrics in 2013, as a result of weakened thermal coal prices and the continued funding support for its parent, Adaro Energy" adds Wong, also the lead analyst for Adaro.

Adaro's Debt/EBITDA and EBIT/Interest are projected to deteriorate to 2.3x-2.6x and 5.2x-5.7x, respectively, in 2013, compared to 2.0x and 7.7x in FY2012. This is based on Moody's assumption that Newcastle benchmark thermal coal prices will average $90 per tonne in 2013, Adaro will successfully reduce its production cash cost during the same period by 2-7% to alleviate its margin pressure and achieve a sales volume of 50-53 million tonnes.

Cost cutting measures include the reduction of planned stripping ratio to 5.75x from 6.4x in 2012, however, the benefit of pre-stripping activity in 2012 and reducing stripping ratio in 2013 is likely to be one-off, without compromising the overall mining plan. The completion of an overburden crusher conveyor system and the mine-mouth power plant in Q2 2013 will also enhance efficiency and cost savings.

Adaro's strong liquidity profile continues to buffer it against the weak operating environment. Adaro recorded $301 million of cash on hand and has access to $300 million of undrawn, committed banking facilities as at 31 December 2012. The company is currently refinancing a bank loan of $377 million maturing in 2013 and 2014 to extend debt maturity and financial flexibility.

"Funding support for Adaro Energy and Adaro Energy's plans to invest in greenfield independent power projects (IPPs) are also key negative rating drivers, but we take some comfort as Adaro Energy will significantly reduce its capex by about 60% and dividend payout in 2013, and the Group has adopted a liquidity and capital conservation strategy amidst the current challenging operating environment" says Wong.

Moody's expects Adaro to fund Adaro Energy's 2013 cash requirement with its operating cash flow and cash on hand.

Adaro is the principal cash flow generator and a borrower of record, to fund Adaro Energy's vertical integration strategy. Funds have been channeled to the various sister companies through Adaro Energy in the form of dividends, intercompany loans, advances and prepayments against services to undertake the work.

Adaro's ratings also reflect its status as one of the world's lowest-cost producer and exporter of thermal coal, its quality and diversified customer base, mainly comprising power utilities in the region.

However, the ratings also recognize key challenges including various greenfield power plant and mining projects undertaken by Adaro Energy which could exert further pressure on the credit profile of both Adaro Energy and Adaro. Moody's will review the financial structure when the IPPs reach financial close and adjust Adaro Energy's total debt as needed.

Adaro is also one of the most highly rated single commodity mining companies globally; furthermore, its revenue base remains relatively small and the company lacks production diversity compared with similarly rated global peers.

The stable outlook reflects our expectation that Adaro will focus on deleveraging and cost control, as well as exercise prudence in its financial management.

The possibility of upward pressure is limited given the current weak market conditions.

Downward pressure could emerge, if Adaro experiences material disruption to its operations or industry fundamentals further deteriorate to the extent that Adaro's ability to service its debt is weakened. Such trends could be evidenced by adjusted debt/EBITDA rising above 2.5x and/or EBIT/interest falling below 4x on a sustained basis.

Similarly, if Adaro Energy's adjusted debt/EBITDA rises above 3- 3.5x and/or EBIT/interest falls below 3x on a sustained basis, Adaro's ratings would come under pressure.

Other negative rating trends include: 1) event risk as a result of any adverse decision regarding the off-setting of VAT payments; 2) any change in laws and regulations, particularly on the mining concessions, that would affect the business; and 3) any abrupt change in financial or operational strategy and/or dividend policies.

The principal methodology used in this rating was Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Adaro Indonesia is one of the largest single-site coal producers in the southern hemisphere and one of the world's largest sub-bituminous coal companies. It exports 77.3% of its products to Asia, the US and Europe, while the rest is for the domestic market.

It is wholly owned by Adaro Energy, an integrated energy group, listed on the Indonesia Stock Exchange.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Simon Wong
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's affirms Adaro's ratings at Ba1; outlook stable
No Related Data.
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