Singapore, October 21, 2021 -- Moody's Investors Service has affirmed the Ba3 corporate family
rating (CFR) of Indika Energy Tbk (P.T.), the Ba3
ratings on the $575 million backed senior secured notes due 2024
issued by Indika Energy Capital III Pte. Ltd., and
the $675 million backed senior secured notes due 2025 issued by
Indika Energy Capital IV Pte. Ltd.
At the same time, Moody's has revised the outlook to stable
from negative.
"The outlook revision to stable reflects our expectations that Indika's
credit metrics will improve and remain within the parameters of its Ba3
ratings over the next 12-18 months, amid an increase in thermal
coal prices from the low levels observed in 2020," says Maisam
Hasnain, a Moody's Vice President and Senior Analyst.
"The affirmation of Indika's Ba3 ratings reflects the company's
diversified operations, long operating track record, solid
liquidity and continued adherence to prudent financial policies,"
adds Hasnain, who is also Moody's lead analyst for Indika.
RATINGS RATIONALE
Amid record high thermal coal prices, Moody's estimates Indika's
adjusted leverage -- as measured by adjusted debt/EBITDA -
will decline to around 2.3x in 2021 from around 7.3x in
2020, due to stronger earnings particularly at its 91%-owned
coal mining subsidiary, Kideco Jaya Agung (P.T.).
Kideco's cash profit per ton (net of royalties) has already jumped
to around $14 in the six months ended June 2021 (1H 2021) from
around $7.5 in 1H 2020.
While historical prices suggest the current high Newcastle thermal coal
price of around $240 per ton is unlikely to be sustained for a
prolonged period, based on Moody's medium-term price
assumptions for Newcastle thermal coal of $75-$83
per ton, Indika's adjusted leverage of 3.0x-3.5x
over the next two years will remain within the 4.0x ratings downgrade
trigger at the Ba3 rating level.
Moody's expectations for Indika include its contract mining subsidiary
Petrosea Tbk (P.T.) and engineering subsidiary Tripatra
Multi Energi (P.T.), which contributed 14%
and 7% of consolidated revenue in 1H 2021, executing new
contracts with external customers over the next 12-18 months.
Indika's scale and business diversity will weaken if these subsidiaries
are unable to sign new contracts to replenish their declining order book.
Moody's also expects Indika to take a conservative approach toward
new investments as the company diversifies its operations and reduces
its earnings reliance on thermal coal.
As such, Moody's does not expect Indika to prioritize its
stated target to generate 50% of its revenue from non-coal
businesses by 2025 (14% in the first half of 2021) at the expense
of weakening its credit profile. Indika's ability to reach
this target will also depend on external factors, including the
prevailing coal prices, which are outside the company's control.
As part of its diversification strategy, Indika announced in October
2021 that it had acquired the remaining 72% stake it did not own
in Nusantara Resources Limited, which owns a greenfield gold mine
in South Sulawesi, Indonesia, for $42.7 million.
The project requires capital costs of at least $233 million and
will likely start operations by end-2024.
Therefore, Indika's thermal coal operations at Kideco will
likely continue to generate most of the company's earnings over
the next few years and underpin Indika's Ba3 ratings. Kideco
has a long track record of stable production and profitable operations,
with large coal reserves.
Indika's Ba3 ratings also incorporate 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. Regulatory
uncertainty around the extension of Kideco's mine license has decreased
following PT Arutmin Indonesia's 10-year license extension in November
2020. Arutmin, which is owned by Bumi Resources Tbk (P.T.)
(Caa1 negative), was one of the first large Indonesian coal miners
to have its CCoW expire and will likely serve as a precedent for other
CCoW license holders, including Kideco.
Indika will maintain very 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
expects Indika to continue to proactively repay debt ahead of scheduled
maturities, including its large $1.25 billion US dollar
notes, which will mature during 2024-25.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Indika's ESG Credit Impact Score is highly negative (CIS-4).
The score reflects Indika's very high exposure to environmental
risks and high exposure to social risks stemming from its coal mining
operations. The company's strategy to diversify its earnings
away from coal could reduce some of these risks over time.
The company's exposure to environmental risk is very highly negative (E-5
issuer profile score), driven by very high carbon transition risks
for thermal coal, Indika's key earnings driver. This
risk could decline over the next 2-3 years if Indika grows its
non-coal related businesses and reduces its earnings reliance on
thermal coal.
Indika's exposure to social risk is highly negative (S-4
issuer profile score), driven primarily by the high exposure of
its coal mining activities to human capital, health & safety,
responsible production, and demographic and societal trend risks.
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.
Indika's exposure to governance risk is moderately negative (G-3
issuer profile score), driven by challenges associated with its
growth and diversification strategy, which will require incremental
debt and entail execution risk. These risks are somewhat mitigated
by Indika's track record of managing its operations through multiple commodity
price cycles and its adherence to prudent financial policies, including
the proactive refinancing of its debt maturities, modest shareholder
returns, and maintaining its good liquidity with large cash balances,
and its demonstrated access to capital markets.
OUTLOOK
The outlook is stable, reflecting Moody's expectation that Indika
will maintain (1) profitable and cash-generative operations;
(2) a conservative approach to investments and shareholder returns;
and (3) strong liquidity and proactively refinance debt maturities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the rating is unlikely over the next 12-18 months,
given Indika's current scale and risks associated with its diversification
strategy. Nonetheless, upward rating pressure could arise
over time if Indika (1) increases its scale and diversifies its business
while maintaining a strong credit profile; (2) extends the Kideco
coal mining license beyond its 2025 bond maturity, with no material
changes to the existing terms; and (3) maintains very good liquidity,
while proactively refinancing or repaying its large debt maturities due
in 2024-25 well ahead of the scheduled maturity.
Specific financial 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;
(2) Kideco fails to extend its CCoW mining license on substantially similar
terms; or (3) Indika engages in aggressive shareholder distributions
or investments, demonstrating a departure from its track record
of preserving liquidity.
Specific financial 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 IDR12 trillion ($850 million) as of 19 October 2021.
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
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
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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