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
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Client Service: 852 3551 3077
