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Rating Action:

Moody's affirms Medco Energi's B2 CFR; revises outlook to positive

15 Jan 2018

Singapore, January 15, 2018 -- Moody's Investors Service has affirmed the B2 corporate family rating (CFR) of Medco Energi Internasional Tbk (P.T.) (Medco).

Moody's has also affirmed the B2 rating on the $400 million backed senior unsecured bonds issued by Medco Strait Services Pte. Ltd., a wholly-owned subsidiary of Medco.

Moody's has revised the outlook on Medco and Medco Strait Services Pte. Ltd. to positive from stable.

At the same time, Moody's has assigned a B2 rating to the proposed USD-denominated backed senior unsecured bonds to be issued by Medco Platinum Road Pte. Ltd., a wholly-owned subsidiary of Medco. The proposed bonds are irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries. The outlook on Medco Platinum Road Pte. Ltd. is positive.

RATINGS RATIONALE

"The change in the ratings outlook to positive reflects our expectations that Medco's credit metrics will continue to improve over the next 12 months, underpinned by a combination of strong cash flow generation from its oil and gas business and the company's debt reduction plan," says Rachel Chua, a Moody's Assistant Vice President and Analyst.

Moody's expects that Medco's adjusted net debt/EBITDA (net of cash in escrow earmarked for debt repayment) will be around 4.5x in 2017 and further improve to 4.0x-4.2x over the next 12 months from 6.7x in 2016.

For 2018, its EBITDA interest coverage will be around 4x and retained cash flow (RCF) to adjusted net debt at 16%.

Moody's projections incorporate expectations that Medco's oil and gas sales volume in 2018 will be maintained at around 80 thousand barrels of oil equivalent per day (excluding service contracts), thereby supporting EBITDA generation of $440-$460 million compared to $294 million in 2016.

Moody's also expects management to continue to deliver on its deleveraging plan, such that adjusted net debt declines by around 4% in 2018.

Medco's B2 CFR takes into account the company's modest but improving scale of production, as well as its reserves of oil and natural gas, which are in various stages of production and development. The rating also reflects a modest degree of visibility on Medco's cash flow coming from fixed-price natural gas sales agreements, which will account for 25%-30% of the company's total production volume over the next 2-3 years.

At the same time, the rating remains constrained by Medco's weak but improving leverage and liquidity profiles, exposure to the cyclicality of commodity prices, as well as execution risk associated with its investment plan of around $1 billion over the next four years.

"The positive ratings outlook reflects Medco's improved liquidity profile, following its successful rights issuance exercise in December 2017," adds Chua, who is also Moody's Lead Analyst for Medco. "The net proceeds of $195 million will be used for debt repayment over the next few months; thereby alleviating liquidity pressures."

Alongside the rights issuance, Medco has also issued warrants that shareholders can exercise in 2018-2020, which should bring in equity proceeds of around $200 million.

As of 30 September 2017, Medco had cash and cash equivalents of $450 million compared to $300 million of debt maturing over the next 12 months. Moody's believes its cash balance, proceeds from its rights issuance and operating cash flow generation will sufficiently fund the company's capital investment plan and debt maturities through 2018.

Moody's continues to assume that Medco will not provide financial support in the form of equity injections, shareholder loans or loan guarantees to its power and mining companies. Moody's also does not expect meaningful dividend contribution from these businesses over the next 2-3 years.

The $375 million acquisition loan at Medco's 41.1%-owned, mining associate, Amman Mineral Nusa Tenggara (AMNT), which was partly guaranteed by Medco was fully prepaid in December 2017. As such, Medco no longer guarantees any of AMNT's loans.

Medco's CFR could be upgraded after the completion of its debt-reduction plan, if the company's: (1) adjusted debt/EBITDA falls below 4.5x, RCF/adjusted debt increases above 15%, and EBITDA/interest expense increases above 4.0x; or cash and cash equivalents cover at least the amount of debt maturing over the next 12 months, all on a sustained basis.

Given the positive outlook, a rating downgrade is unlikely.

Nonetheless, the rating outlook could be revised to stable if Medco: (1) fails to execute its deleveraging plan, or if there are material delays in implementation; (2) makes any material debt-funded acquisitions before completion of the debt reduction exercise; or (3) provides funding support to its mining or power businesses.

Specific credit metrics that Moody's would consider to revise the outlook to stable include adjusted debt/EBITDA between 4.5x-5.5x, RCF/adjusted debt between 10%-15%, and EBITDA/interest expense below 4x.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) is predominantly an oil and gas exploration and production company, with additional operations in downstream oil and gas activities, power generation, and copper, gold and coal mining.

Medco reported proved developed reserves of 169.4 million barrels of oil equivalent (mmboe) at 30 September 2017, and oil and gas production volumes of 80 thousand barrels of oil equivalents per day (mboepd) (excluding service contracts) for the nine months ended 30 September 2017.

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 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.

Rachel Chua
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

Laura Acres
MD - Corporate Finance
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

No Related Data.
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