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Rating Action:

Moody's assigns first-time B3 ratings to Toba Bara

23 Feb 2018

Singapore, February 23, 2018 -- Moody's Investors Service has assigned a B3 corporate family rating (CFR) to Toba Bara Sejahtra Tbk (P.T.).

At the same time, Moody's has assigned a B3 rating to the proposed senior secured bond issued by Toba Bara.

The outlook on all ratings is stable.

Toba Bara will use the net bond proceeds to refinance bank debt, fund its equity contribution in two power projects, and make acquisitions in the coal mining and power sectors.

This is the first time that Moody's has assigned a rating to Toba Bara.

RATINGS RATIONALE

"Toba Bara's B3 rating is supported by its track record of maintaining a solid operating performance through the coal price cycle, supported by its low-cost operations and steady production volumes," says Maisam Hasnain, a Moody's Analyst.

Toba Bara, through its majority ownership in its three coal subsidiaries, has maintained solid cost controls and generated positive EBITDA per ton even during the coal price declines in 2015-2016.

The company also benefits from a logistical advantage, as its three mining subsidiaries are adjacently located in East Kalimantan within close proximity to jetties and transshipment points. The three mines also operate under a joint mine plan which helps maximize consolidated reserves and capacity for overburden removal.

"However, Toba Bara's B3 rating is constrained by the modest scale of its business, with consolidated revenue of around $300 million in 2017, relative to rated peers and current reliance on dividends from one mine to service debt at the holding company," adds Hasnain, also Moody's lead analyst for Toba Bara.

As a holding company, Toba Bara is reliant on cash distributions from subsidiaries to service its debt, and its principal cash flow generating asset is a 51% stake in PT Adimitra Baratama Nusantara (ABN), which contributed around 70% of total consolidated revenue in 2017, and has been the primary cash contributor in recent years. However, Moody's expects modest contributions from other mining subsidiaries from 2018.

Toba Bara's B3 rating also incorporates its evolving acquisition strategy. The company plans to use around $150 million of its proposed bond proceeds to make brownfield acquisitions in the coal and power sectors.

"We expect the company to remain acquisitive in the near term in order to increase its coal reserve base and accelerate its growth as coal reserves at its existing mine sites will be fully mined by 2026 - 2027 ," adds Hasnain.

Toba Bara's B3 rating also reflects Moody's expectation that its two greenfield power plants will be completed on time and within budget. The company is developing two 2 x 60 MW gross capacity coal -fired power plants in Gorontalo and North Sulawesi under 25-year agreements with Perusahaan Listrik Negara (P.T.) (Baa3 positive) as a single off-taker under a build, own, operate, transfer (BOOT) scheme.

Once operational, the plants will provide Toba Bara with stable earnings and a more diversified business profile from 2020-2021. Nevertheless, the development of the plants -- at a cost of around $430 million -- raises execution risk over the next two to three years.

Accordingly, coal sales will remain the predominant contributor to Toba Bara's earnings and cash flows over the next few years until the power projects become fully operational.

Given these large planned capital expenditure and acquisition plans, Toba Bara's financial metrics will weaken from their current levels.

"Under Moody's expectations for Newcastle thermal coal prices to average $68-$80 per ton, Toba Bara's adjusted consolidated debt/EBITDA will increase considerably to 5.0x-6.5x through 2020 from around 1.2x as of 30 September 2017, while holding company interest coverage will fall below 1.0x in the absence of incremental cash flows from planned acquisitions," adds Hasnain.

The stable outlook reflects Moody's expectation that Toba Bara will effectively execute its growth strategy while maintaining prudent operating and financial policies, including minimal shareholder returns.

What Could Change the Rating -- Up

Upward ratings pressure over the next 12-18 months is unlikely, given Toba Bara's current scale and the elevated integration and execution risk associated with potential acquisitions and the construction of its power plants.

Nevertheless, upward ratings pressure could emerge over time if Toba Bara improves its business profile though earnings-accretive acquisitions, and remains on track to complete its power projects on time and within budget. A track record of acquiring new mines and ramping up production, while improving its mine reserve life and increasing liquidity at the holding company, would also be positive for the rating.

What Could Change the Rating -- Down

Downward pressure on the rating could emerge if industry fundamentals deteriorate, leading to a decline in Toba Bara's ability to generate free cash flow and grow its business; or if Toba Bara adopts shareholder return policies that weaken its liquidity or cause it to incur additional debt.

Indicators Moody's would consider for a downgrade are (1) adjusted consolidated debt/EBITDA rising above 6.5x; and (2) an adjusted EBIT margin below 15% on a sustained basis.

In addition, any weakness in debt serviceability at the holding company, such that interest cover from dividend receipts falls below 1.0x on a sustained basis would also lead to negative ratings pressure.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Toba Bara Sejahtra Tbk (P.T.), through its majority ownership in three coal subsidiaries, is an Indonesian thermal coal producer with three adjacent coal mines with combined annual production volume of around 5 million tons. As of 01 February 2018, the company was 61.79% owned by Highland Strategic Holding Pte. Ltd, Singapore-based passive private investment trust comprised of institutional and high net worth investors.

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.

Maisam Hasnain
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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