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Rating Action:

Moody's assigns provisional (P)B2 rating to Berau Coal

22 Jun 2010

Singapore, June 22, 2010 -- Moody's Investors Service has today assigned a provisional (P)B2 corporate family rating to PT Berau Coal ("Berau"). At the same time, Moody's has assigned a provisional (P)B2 senior secured bond rating to the proposed senior secured notes issued by Berau Capital Resources Pte Ltd, which is wholly owned by PT Berau Coal Energy ("BCE"). The outlook on both ratings is stable.

BCE is a 90% shareholder of Berau. The bonds are guaranteed by BCE and its subsidiaries, which includes Berau. BCE intends to raise a USD bond offering and a bank loan facility, to partially refinance the bridge loans for the acquisition of Berau by Recapital Advisors ("Recapital").

The provisional status of the ratings will be removed upon completion of the bond issuance and bank loan. If the debt financing plan fails to go ahead, the ratings will be under pressure in view of Berau's refinancing risk and weak liquidity profile.

"Berau's B2 ratings reflect its status as one of the world's lowest-cost producers and exporters of coal, and the quality of its customer base, comprising large utilities with excellent payment records," says Laura Acres, a Moody's Vice President and Senior Credit Officer.

"Its coal mines also have a long concession life and well established operations, with a track record of consistent production growth," adds Acres.

"Among the key challenges Berau faces are its exposure to commodity cycles for both coal sales and fuel procurement, leading to earnings and cash flow volatility, although this can be partially mitigated by a policy of locking sales prices in up to one year in advance."

"The rating also recognizes the company's lack of diversification, given its single concession and product, as well as the high level of concentration risk, given that its top ten customers account for approximately 83% of revenues," says Acres, also Moody's Lead Analyst for the company.

Moody's is also concerned over the high level of acquisition debt across the extended group, which relies primarily on cash flows from Berau to service its debt. This is exacerbated by the near term liquidity risk due to US$580 million of vendor notes, incurred as part of the acquisition, which are due in December 2010.

Moody's has therefore included such debt in computing the adjusted ratios for Berau, resulting in an expected, adjusted debt/EBITDA of 5.0x in FY2010, compared to 2.4x if only guaranteed debt is included. As such, the company's strong pre-acquisition credit metrics have been weakened considerably by the debt adjustment, such that its adjusted leverage will be more line with that of its B-rated coal mining peers.

"We're also concerned about the risk appetite of the new shareholders, as well as the lack of clarity regarding long-term strategy for Berau, given Recapital's role as a financial investor," Acres adds.

The stable outlook reflects the expectations that Berau will implement its business plan and maintain its competitiveness in the near to medium term.

Upward rating pressure could emerge if Berau expands its production capacity, such that a sustainable improvement in the underlying business model (driven by improved operating performance from increased production) develops.

Credit metrics that will support an upgrade include adjusted consolidated debt/EBITDA lower than 4.0x and adjusted consolidated EBIT/Interest expense higher than 2.5x. In particular, Moody's would also like to see some clarity with regard to the repayment of the US$580 million vendor notes that are due to expire in December 2010.

Downward pressure on the rating could emerge if industry fundamentals deteriorate, leading to a decline in free cash flow that could constrain Berau's ability to fund scheduled debt payments at the holding company level.

Indicators Moody's would consider include adjusted consolidated debt/EBITDA rising above 6.0x or adjusted consolidated EBIT/interest expense falling below 1.5x.

Other negative rating trends include 1) a lack of resolution with regard to the maturity and payment of the vendor notes; 2) event risk as a result of any adverse decision regarding the off-setting of VAT payments; and 3) any change in laws and regulations, particularly on the mining concessions, that would affect the business.

Moody's had previously rated Berau at B1 until 9th February, 2010, when the rating was withdrawn for business reasons.

The principal methodology used in rating Berau was Moody's Global Mining Industry published in May 2009 and available on www.moodys.com in the Rating Methodologies subdirectory under the Research and Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies subdirectory on Moody's website.

Berau is Indonesia's fifth-largest producer and exporter of thermal coal. It operates three active mines at a single site in East Kalimantan. It has estimated resources of approximately 1.4 billion tons, with probable and proven reserves estimated at 346 million tons.

Hong Kong
Laura Acres
VP - Senior Credit Officer
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
Managing Director
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns provisional (P)B2 rating to Berau Coal
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