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Rating Action:

Moody's assigns Ba1 ratings to Adaro Indonesia; outlook stable

15 Oct 2019

Singapore, October 15, 2019 -- Moody's Investors Service has assigned a Ba1 corporate family rating (CFR) to Adaro Indonesia (P.T.) (AI).

In addition, Moody's has assigned a Ba1 rating to the proposed USD senior notes to be issued by the company, which will be guaranteed by its parent Adaro Energy Tbk (P.T.). The proposed notes are unsecured and will effectively rank pari passu with AI's existing bank debt.

The ratings outlook is stable.

AI will use the notes' net proceeds to repay existing debt, fund capital spending, and for general corporate purposes.

RATINGS RATIONALE

AI's Ba1 rating reflects the credit quality of its parent Adaro Energy, given the strong operational links between the two companies. These include (1) Adaro Energy holding the largest stake in AI at 88.5%, (2) AI benefiting from Adaro Energy's vertically integrated operations across the coal supply chain, and (3) Adaro Energy guaranteeing all of AI's debt.

"Adaro Energy's credit quality is supported by AI, which is its key subsidiary and one of the largest single location coal producers in the southern hemisphere, with substantial thermal coal reserves, low operating costs, and solid profitability through the coal price cycles," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

Adaro Energy's thermal coal business has a long track record of stable operations with annual production of around 50 million tons since 2013, making it the second largest coal producer by volume in Indonesia.

The thermal coal operations are supported by an integrated supply chain covering mining contracting, transportation, port operations and power generation. The integrated supply chain helps the group improve its operating efficiency, maintain cost controls and reduces reliance on third-party vendors.

Adaro Energy's credit profile is also supported by its adherence to conservative financial policies. Over the last 10 years, its long-term average adjusted leverage -- as measured by adjusted debt/EBITDA -- has been low, hovering around 2.0x. Moody's expects Adaro Energy to maintain similar leverage levels over the next 2-3 years.

Adaro Energy also has a record of prefunding or prepaying its debt well ahead of maturity. For example, in 2014, AI refinanced its $800 million notes issued in 2009 with a syndicated loan, five years ahead of scheduled maturity.

"At the same time, Adaro Energy's credit quality is constrained by its limited operational and geographic diversification, keeping the group reliant on thermal coal sales to drive the majority of revenue and earnings over the next few years," adds Hasnain, also Moody's Lead Analyst for AI.

However, Adaro Energy has taken steps to diversify its earnings, as reflected in its investments in two Indonesian power projects, which are scheduled to start by the end of 2019 and 2020 respectively. In addition, the company purchased an effective 35% stake in Kestrel Coal Mine, an Australian metallurgical coal producer, in 2018.

Moody's estimates that dividends from these entities are likely to be minimal over the next 2-3 years. As such, Adaro Energy's credit profile will continue to be driven primarily by its thermal coal operations in South Kalimantan, exposing the group to a high degree of operational and geographic concentration risk.

The Ba1 ratings also reflect Moody's expectation that AI's coal contract of work (CCoW) mining license, which expires in October 2022, 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.

Moody's expects Adaro Energy will maintain strong liquidity over the next 12-18 months with sufficient cash to meet its needs until 31 December 2020. The proposed notes will further strengthen its liquidity and help address its cash needs through 2021, including scheduled debt maturities and capital spending.

The proposed notes are rated in line with AI's Ba1 CFR. Legal subordination risk for bondholders is mitigated as the proposed notes will effectively rank pari passu with AI's existing bank loans, which are also unsecured. Structural subordination risk is mitigated as AI is an operating company, generating the majority of Adaro Energy's revenue.

The rating also considers Adaro Energy's exposure to environmental, social and governance (ESG) risks as follows:

First, Adaro Energy faces elevated environmental risks associated with the coal mining industry, including carbon transition risks as countries seek to reduce their reliance on coal power. However, Adaro Energy is better positioned than other global coal miners to manage these risks, given (1) its 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 better coal quality, with low ash and sulfur content.

Second, Adaro Energy is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. The company pursues a "zero mine site accidents" goal at its mines. It also sponsors corporate social responsibility projects through the Adaro Foundation, and runs programs to supply clean water to local communities through Adaro Water.

Third, with respect to governance, Adaro Energy's ownership is concentrated in its major shareholders, who directly and indirectly own 64% of the company. However, this risk is balanced against Adaro Energy's listed status, supportive shareholders and long track record of maintaining prudent financial policies.

The stable outlook reflects Moody's expectation that Adaro Energy will effectively execute its growth strategy while continuing to adhere to conservative financial policies.

Upward rating pressure over the next 12-18 months is unlikely, given Adaro Energy's lower scale and limited product diversification compared with similarly rated mining peers.

Nevertheless, Moody's could upgrade the ratings if Adaro Energy materially improves its business profile through product and geographic diversification, while adhering to conservative financial policies and maintaining a prudent approach towards further investments and shareholder distributions.

Moody's could downgrade the ratings if (1) Adaro Energy experiences operational disruptions or industry fundamentals weaken, such that its earnings and cash flow decline, (2) AI fails to extend its CCoW on similar terms, or (3) Adora Energy engages in aggressive shareholder distributions or capital investments, which would indicate a deviation from its stated prudent financial policies.

Specifically, adjusted debt/EBITDA above 3.0x or adjusted EBIT/interest below 4.0x on a sustained basis could prompt a review for downgrade.

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.

Adaro Indonesia (P.T.) (AI) is one of the largest single-site coal producers in the southern hemisphere, and one of the world's largest sub-bituminous coal companies. AI is 88.5% owned by Adaro Energy Tbk (P.T.), an integrated energy group listed on the Indonesia Stock Exchange with a market capitalization of around IDR41.6 trillion ($2.9 billion) as of 14 October 2019.

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

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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