Singapore, April 17, 2020 -- Moody's Investors Service has affirmed Bukit Makmur Mandiri Utama
(P.T.)'s (BUMA) Ba3 corporate family rating (CFR)
and the Ba3 rating on its senior secured notes.
At the same time, Moody's has revised the outlook on these ratings
to negative from stable.
RATINGS RATIONALE
"The change in BUMA's outlook to negative from stable reflects
our expectations that amid an already challenging operating environment,
BUMA's credit metrics and liquidity will weaken further following
the loss of a key customer," says Maisam Hasnain, a
Moody's Assistant Vice President and Analyst.
"At the same time, the affirmation of BUMA's Ba3 ratings
reflect its (1) position as Indonesia's second-largest coal
mining services contractor by overburden volume, with a well-recognized
franchise and established relationships with Indonesia's largest
coal miners; and (2) our expectation that BUMA will maintain a prudent
capital structure with conservative financial policies," adds
Hasnain, who is also Moody's Lead Analyst for BUMA.
BUMA's mining service contract with its third largest customer,
Kideco Jaya Agung (P.T.), a subsidiary of Indika Energy
Tbk (P.T.) (Ba3 stable) will not be extended this year.
This is because Indika has decided to gradually transfer mining services
at Kideco from BUMA to its own mining contractor in the coming months.
Moody's previously expected that the Kideco contract, which
generated 9% of BUMA's consolidated revenues in 2019,
would be renewed at broadly similar terms.
As a result of the expiring Kideco contract, Moody's expects
BUMA's adjusted leverage -- as measured by adjusted debt/EBITDA
-- to increase by around 0.3x from its previous projection
to 3.3x -- 3.5x over the next 12-18 months.
In addition, in light of weak coal prices and slowing economic growth,
the downside risk to BUMA's adjusted leverage worsening beyond Moody's
current expectations is elevated, particularly if coal miners cut
back on production volumes this year.
The lost contract with Kideco further exacerbates customer concentration
and contract renewal risk for BUMA, which has another large near-term
contract expiry.
BUMA's contract with its largest customer Berau Coal (P.T.)
at Berau's Binungan coal mine, which Moody's estimates
contributes to around 20% of BUMA's annual overburden removal volumes,
expires in December 2020. BUMA's ratings will be downgraded
if it fails to renew this contract or renews the contract at substantially
lower rates or contracted volumes.
Furthermore, the loss of the Kideco contract increases BUMA's
customer concentration risk as it is now more dependent on its two largest
customers, Berau (Lati and Binungan mines) and Adaro Indonesia (P.T.)
(Ba1 stable), which contributed to 48% and 11% of
BUMA's consolidated revenues in 2019, respectively.
Also, while BUMA's mining operations have not yet been materially
impacted by the coronavirus outbreak, its earnings and cash flow
could experience considerable volatility in the event of temporary closures
at multiple mine sites.
Thus far, only one of BUMA's customers Bayan Resources Tbk (P.T.)
(Ba3 stable) announced on 27 March that operations at its Tabang mines
would be temporarily suspended through the end of April. BUMA expects
to make up for the lost volume later in the year.
Moody's expects BUMA's liquidity will remain weak, with BUMA's
internal cash sources being insufficient to meet its cash needs over the
next 12-18 months. The company has also fully drawn down
its bank loan facilities.
BUMA has some flexibility in terms of cutting back on capital spending
to preserve liquidity, or funding capital spending through new finance
leases. However, its limited liquidity buffer reduces its
ability to withstand a protracted downturn in coal demand and prices.
BUMA's rating will likely be downgraded if its liquidity weakens
further over the next three to six months.
The rating also considers BUMA's exposure to environmental,
social and governance (ESG) risks as follows.
First, BUMA is exposed to elevated environmental risks associated
with the coal mining industry, including carbon transition risk
as countries seek to reduce their reliance on coal power. This
risk is somewhat mitigated by BUMA's customers supplying coal primarily
to Asia, a region with growing energy demand.
Second, BUMA is also exposed to social risks associated with operating
in the coal mining industry. To address these risks, BUMA
conducts initiatives under its occupational health and safety systems,
which pursue a zero-harm objective for workers. To strengthen
community relations, BUMA also implements programs to improve education,
living conditions and promote small local businesses.
Third, with respect to governance, BUMA's ownership
is concentrated. The company is fully owned by PT Delta Dunia Makmur
Tbk (Delta), an investment holding company listed on the Indonesia
Stock Exchange. Delta, in turn, is 38% owned
by an international consortium through Northstar Tambang Persada Ltd,
comprising Northstar Equity Partners, TPG Capital, GIC Pte.
Ltd. and China Investment Corporation.
Although the consortium has remained invested in BUMA since 2009,
its longer-term strategy and investment horizon remain unclear.
Financial investors typically have an investment horizon of five to 10
years, suggesting that the shareholder group could seek an exit
over the life of BUMA's $350 million notes due in February
2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of BUMA's rating is unlikely over the next 12-18
months, given the negative outlook.
The outlook could be revised to stable if BUMA (1) extends its contract
with Berau at the Binungan mine at substantially similar terms; (2)
achieves its expected overburden removal volumes while maintaining its
current profitability; and (3) improves its liquidity such that its
cash sources are sufficient to meet its planned needs over the next 12-18
months.
Specific indicators that Moody's would consider for a change in outlook
to stable include adjusted debt/EBITDA staying below 3.25x and
retained cash flow/net debt staying above 25%, on a sustained
basis.
Moody's could downgrade the ratings if (1) BUMA experiences operational
disruptions or declining profitability; (2) its liquidity weakens;
(3) payments from Berau are delayed, such that the average days
for payment collection exceed 65 days; or (4) it loses more contracts,
or if its expiring contracts are not renewed on similar or enhanced terms.
Specific financial metrics indicative of a downgrade include BUMA's
adjusted debt/EBITDA staying above 3.5x, retained cash flow/net
debt staying below 20%, or EBITA/interest expense staying
below 2.0x, on a sustained basis.
In addition, negative ratings pressure would rise if there are significant
changes in Northstar Tambang Persada Ltd's shareholding in PT Delta
Dunia Makmur Tbk, or if BUMA's underlying financial strategy were
to change materially.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Established in 1998, Bukit Makmur Mandiri Utama (P.T.)
(BUMA) is a coal mining services contractor in Indonesia, providing
open-cut mining services to some of the country's largest coal
producers.
BUMA is 100% owned (less one share) by Delta, an investment
holding company listed on the Indonesia Stock Exchange, which,
in turn, is 38% owned by Northstar Tambang Persada Ltd.
The remaining 62% stake in Delta is held by public and institutional
investors.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Regulatory disclosures contained in this press release apply to the credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
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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
Ian Lewis
Associate Managing Director
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
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