Singapore, February 04, 2020 -- Moody's Investors Service has affirmed the Ba3 corporate family
rating (CFR) of Indika Energy Tbk (P.T.) (Indika).
At the same time, Moody's has also affirmed 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. All notes
are unconditionally and irrevocably guaranteed by Indika and rank pari
passu.
The outlook is stable.
RATINGS RATIONALE
"The rating affirmation reflects our expectation that, despite
weakness in its credit metrics, Indika's credit profile will
be supported by its stable operations, strong liquidity and adherence
to prudent financial policies," says Maisam Hasnain,
a Moody's Assistant Vice President and Analyst.
Indika's commitment to maintaining a strong balance sheet provides
cushion against its weakening credit metrics, the result in turn
primarily of declining coal prices. The company had a large cash
balance of around $611 million as of 30 September 2019, with
no material near-term debt maturities until 2022.
Nevertheless, declining coal prices over the last 12 months have
weakened Indika's credit metrics, and have lowered earnings
at its 91% owned mining subsidiary, Kideco Jaya Agung (P.T.).
Kideco's reported EBITDA for the nine months ended September 2019
declined to $188 million from $430 million for the nine
months in the preceding year. As a result, Indika's
adjusted leverage -- as measured by adjusted debt/EBITDA
-- increased to 3.5x as of September 2019 from 2.4x
in 2018.
Based on Moody's medium-term price assumptions for Newcastle thermal
coal of around $75 per ton, Moody's estimates Indika's
adjusted leverage will rise further to around 3.8x over the next
12-18 months. However, a prolonged decline in coal
prices will further weaken Indika's leverage, thus eroding
the limited headroom under its Ba3 rating.
The Ba3 CFR reflects Moody's expectation that Kideco's coal contract
of work (CCoW) mining license, which expires in March 2023,
will be extended on broadly similar terms. However, Moody's
believes that there remains a high degree of regulatory risk, given
limited clarity from the Government of Indonesia (Baa2 stable) on the
extension or conversion of such mining licenses.
"Indika's Ba3 CFR also takes into account its commitment to
conservative financial policies which balances its risk profile during
periods of volatility in thermal coal prices. Accordingly,
we expect Indika to maintain a prudent approach to any new investments,
particularly as it seeks to reduce its earnings exposure to thermal coal
in the coming years," adds Hasnain, also Moody's
Lead Analyst for Indika.
Indika has sufficient liquidity to meet its cash needs for the next 12-18
months, and Moody's expects Indika to continue to proactively
refinance its debt maturities well ahead of its large $1.1
billion debt maturity wall between 2022 and 2024.
While Indika is likely to not meet a financial maintenance covenant on
its bank loans in 2020, Moody's expects the company will address
this risk by either obtaining waivers or renegotiating its covenants.
Indika's holding company cash balance of $348 million is
also considerably larger than the $201 million outstanding balance
on these bank loans as of 30 September 2019.
The rating also considers 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 initiates 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 somewhat mitigated
by Indika's listed status and long track record of maintaining prudent
financial policies.
The stable rating outlook reflects Moody's expectation that Indika will
(1) maintain its credit profile and retain a conservative approach to
investments and shareholder returns; and (2) sustain strong liquidity
and proactively refinance debt maturities.
A near-term upgrade of the ratings is unlikely. Nevertheless,
the ratings could be upgraded in the longer term if Indika improves its
credit metrics on a sustained basis, and is successful in extending
the Kideco CCoW beyond its 2024 bond maturity, with no material
changes to the existing terms.
Specific indicators Moody's would consider for an upgrade include
adjusted debt/EBITDA below 2.5x and adjusted EBIT/interest above
3.0x, 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; (2) Kideco fails to extend
its CCoW on substantially similar terms; or (3) Indika engages in
aggressive shareholder distributions or investments, demonstrating
a departure from its track record of liquidity preservation.
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. 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 IDR4.9 trillion ($360 million) as of 03 February
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 ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
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.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
