Singapore, October 12, 2020 -- Moody's Investors Service has affirmed the Ba3 corporate family
rating (CFR) of Indika Energy Tbk (P.T.), and the
Ba3 ratings on the $285 million backed senior secured notes due
2023 issued by Indo Energy Finance II B.V., the $265
million backed senior secured notes due 2022 issued by Indika Energy Capital
II Pte. Ltd, and the $575 million backed senior secured
notes due 2024 issued by Indika Energy Capital III Pte. Ltd.
At the same time, Moody's has assigned a first-time
Ba3 rating to the backed senior secured notes to be issued by Indika Energy
Capital IV Pte. Ltd. The proceeds from the notes will be
primarily used to refinance existing debt. The notes are unconditionally
and irrevocably guaranteed by Indika and will rank pari passu with Indika's
outstanding US dollar notes.
The outlook remains negative.
"The affirmation of Indika's Ba3 ratings reflect its diversified
operations, long operating track record, solid liquidity,
and continued adherence to prudent financial policies -- as shown
by its planned US dollar notes issuance to proactively refinance its debt
maturities ahead of schedule," says Maisam Hasnain,
a Moody's Assistant Vice President and Analyst.
"The negative outlook continues to reflect our expectation that its credit
metrics will remain weak over the next 12 months amid a challenging operating
environment, including low thermal coal prices," adds Hasnain,
also Moody's Lead Analyst for Indika.
RATINGS RATIONALE
Moody's expects proceeds from Indika's proposed US dollar
notes issuance, which form part of its $650 million debt
raising plans announced in September, will be used primarily to
refinance the majority of its US dollar notes coming due in 2022-23.
Part of the proceeds will also be used to invest in non-coal related
businesses.
Upon completion of its planned refinancing, which Moody's
views as credit positive, Indika will not have any material debt
maturities until 2024. As a result, Indika's strong
liquidity and minimal near-term refinancing risk afford it time
to improve its weak credit metrics amid challenging business conditions,
including low thermal coal prices.
Based on its medium-term price assumptions for Newcastle thermal
coal of $65 per ton, Moody's estimates Indika's adjusted
leverage -- as measured by adjusted debt/EBITDA - will remain
elevated at around 4.3x as of 31 December 2021, up from 3.5x
in December 2019 and slightly above the downgrade trigger of 4.0x.
However, in light of slowing economic growth, the downside
risk to Indika's credit metrics worsening beyond Moody's current expectations
is elevated, particularly if coal prices remain low for a prolonged
period.
In order to support earnings, Indika has taken steps to reduce operating
cash costs at its 91%-owned coal mining subsidiary,
Kideco Jaya Agung (P.T.) to $32.3 per ton
in 1H 2020 from $35.6 per ton in 1H 2019. Indika's
contract mining subsidiary PT Petrosea Tbk and engineering subsidiary
PT Tripatra Multi Energi, are also seeking new contracts to boost
their contract order books which have been declining in recent years,
although near-term contract wins could be challenging given the
weak macroeconomic environment.
Moody's expects Indika will maintain its good liquidity, as
its large consolidated cash balance and projected operating cash flows
will be sufficient to meet its cash needs over the next 12-18 months.
Moody's also expects Indika's planned investments, as
part of its strategy to diversify earnings away from thermal coal,
will not materially weaken its liquidity.
Moody's also expects Indika to obtain additional covenant relaxations
or waivers on its two bank loan facilities. In June, Indika
obtained temporary covenant relaxations on these facilities, which
allowed for its leverage ratio to be calculated as net debt/EBITDA not
exceeding 3.75x until December 2020 on one loan and until March
2021 on the other. Absent a material near-term earnings
improvement, a covenant breach would likely occur once the covenant
ratio reverts to the original gross debt/EBITDA calculation beyond December
2020 and March 2021, respectively.
The ratings also consider Indika's exposure to environmental, social
and governance (ESG) risks as follows.
First, Indika faces elevated environmental risks associated with
the coal mining industry, including carbon transition risk as countries
seek to reduce their reliance on coal power. However, this
risk is somewhat mitigated by (1) Indika's geographically diversified
customer base, which includes state-owned utilities across
Asia, a region with growing energy demand and where thermal coal
is still a relatively low-cost source of energy, and (2)
its good coal quality, with low ash and sulfur content.
Second, Indika is also exposed to social risks associated with the
coal mining industry, including health and safety, and responsible
production. To address these risks, Indika has initiated
sustainability initiatives under its health, safety and environment
programs, and carries out corporate social responsibility activities
via the Indika Foundation.
Third, with respect to governance, Indika's ownership is concentrated
in its major shareholders, who own around 68% of the company.
However, this risk is mitigated by Indika's listed status and long
track record of maintaining prudent financial policies.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Indika's ratings is unlikely over the next 12-18
months, given the negative outlook.
The outlook could return to stable if Indika improves its credit metrics
on a sustained basis, and maintains sufficient liquidity to cover
its cash needs over the next 12-18 months.
Specific indicators that Moody's would consider for a change in outlook
to stable include adjusted debt/EBITDA below 4.0x and adjusted
EBIT/interest above 2.0x, both for an extended period.
Moody's could downgrade the ratings if (1) Indika's credit metrics weaken
due to a sustained decline in coal prices or reduced production volumes;
(2) Kideco fails to extend its Coal Contract of Work (CCoW) mining license
on substantially similar terms; (3) Indika's liquidity weakens or
it is unable to cure a covenant breach; or (4) Indika engages in
aggressive shareholder distributions or investments, demonstrating
a departure from its track record of preserving liquidity.
Specific indicators Moody's would consider for a downgrade include adjusted
debt/EBITDA above 4.0x or adjusted EBIT/interest below 2.0x,
both for an extended period.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Indika Energy Tbk (P.T.) is an Indonesian integrated energy
group listed on Indonesia's Stock Exchange, with a market capitalization
of around IDR4.8 trillion ($330 million) as of 9 October
2020. Its principal investment is a 91% stake in Kideco
Jaya Agung (P.T.), one of Indonesia's largest domestic
coal producers.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Maisam Hasnain, CFA
Asst Vice President - 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
Client Service: 852 3551 3077
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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