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
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Client Service: 852 3551 3077
