Singapore, May 20, 2020 -- Moody's Investors Service has affirmed the Ba3 corporate family
rating (CFR) of Indika Energy Tbk (P.T.) ("Indika").
At the same time, Moody's has affirmed the Ba3 ratings on the $285
million backed senior secured notes due 2023 issued by Indo Energy Finance
II B.V., the $265 million backed senior secured
notes due 2022 issued by Indika Energy Capital II Pte. Ltd,
and the $575 million backed senior secured notes due 2024 issued
by Indika Energy Capital III Pte. Ltd. All notes are unconditionally
and irrevocably guaranteed by Indika and rank pari passu.
Moody's has also revised the outlook on these ratings to negative from
stable.
RATINGS RATIONALE
"The change in Indika's outlook to negative from stable reflects
our expectation that its credit metrics will deteriorate over the next
12 months, amid a challenging operating environment including weak
thermal coal prices," says Maisam Hasnain, a Moody's
Assistant Vice President and Analyst.
"At the same time, the affirmation of Indika's Ba3 ratings
reflects its diversified operations, large cash balance with manageable
near-term debt maturities, and an adherence to prudent financial
policies," adds Hasnain, who is also Moody's Lead Analyst
for Indika.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented.
More specifically, Indika is exposed to weak thermal coal prices,
which are likely to remain low over the next 12 months as the coronavirus-led
economic downturn reduces demand for thermal coal.
Moody's regards the coronavirus outbreak as a social risk under its environmental,
social and governance (ESG) framework, given the substantial implications
for public health and safety. Today's action reflects the impact
on Indika of the breadth and severity of the shock, and the broad
deterioration in credit quality it has triggered.
Based on its medium-term price assumptions for Newcastle thermal
coal of $60-$65 per ton, Moody's estimates
Indika's adjusted leverage will increase to 5.2x-6.5x
over the next 12-18 months from 3.5x as of 31 December 2019.
The earnings contraction will primarily be driven by lower earnings at
its 91%-owned mining subsidiary, Kideco Jaya Agung
(P.T.), due to lower coal prices. Kideco is
the largest earnings contributor, accounting for 52% of Indika's
reported revenue in 2019.
In addition, in light of weak coal prices and slowing economic growth,
the downside risk to Indika's credit metrics worsening beyond Moody's
current expectations is elevated, particularly if Indika's
sales volume declines this year, or if prices remain low for a prolonged
period.
Earnings growth will also be muted at Indika's contract mining subsidiary
PT Petrosea Tbk and engineering subsidiary PT Tripatra Multi Energi,
which contributed 16% and 15% of consolidated revenue in
2019. The contract order book for both subsidiaries has been declining
in recent years, and given low prevailing energy prices, the
likelihood of winning new contracts this year is low.
Indika has sufficient liquidity to meet its cash needs for the next 12-18
months, and Moody's expects Indika will continue to proactively
refinance its debt maturities well ahead of its large $1.1
billion debt maturity wall between 2022 and 2024. The company's
large consolidated cash balance of around $569 million as of 31
December 2019 affords it flexibility to manage volatility in its operations
amid low coal prices.
Given the weak coal price environment, Indika will likely breach
one of its existing financial maintenance covenants on its bank loans
-- gross debt/EBITDA not exceeding 3.75x - in 2Q 2020.
Moody's expects Indika will address this risk by either obtaining waivers
or renegotiating its covenants, in the first instance.
However, an inability to obtain covenant relief from banks prior
to the breach will likely result in ratings downgrade. This is
because the breach would lead to acute refinancing risk if it triggers
cross-default provisions and accelerated repayments across Indika's
debt, including its $1.1 billion US dollar bonds.
The rating also considers Indika's exposure to ESG risks as follows.
First, Indika faces elevated environmental risks associated with
the coal mining industry, including carbon transition risk as countries
seek to reduce their reliance on coal power. However, this
risk is somewhat mitigated by (1) Indika's 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 good coal quality, with low ash and sulfur content.
Second, Indika is also exposed to social risks associated with the
coal mining industry, including health and safety, and responsible
production. To address these risks, Indika initiates sustainability
initiatives under its health, safety and environment programs,
and carries out corporate social responsibility activities via the Indika
Foundation.
Third, with respect to governance, Indika's ownership is concentrated
in its major shareholders, who own around 68% of the company.
However, this risk is somewhat mitigated by Indika's listed status
and long track record of maintaining prudent financial policies.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Indika's ratings is unlikely over the next 12-18
months, given the negative outlook.
The outlook could return to stable if Indika improves its credit metrics
on a sustained basis, and maintains sufficient liquidity to cover
its cash 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 below 4.0x and adjusted
EBIT/interest above 2.0x, both for an extended period.
Moody's could downgrade the ratings if (1) Indika's credit metrics weaken
due to a sustained decline in coal prices or reduced production volumes;
(2) Kideco fails to extend its Coal Contract of Work (CCoW) mining license
on substantially similar terms; (3) Indika's liquidity weakens
or it is unable to cure a covenant breach; or (4) Indika engages
in aggressive shareholder distributions or investments, demonstrating
a departure from its track record of liquidity preservation.
Specific indicators Moody's would consider for a downgrade include adjusted
debt/EBITDA above 4.0x or adjusted EBIT/interest below 2.0x,
both for an extended period.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/research/Mining--PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Indika Energy Tbk (P.T.) is an Indonesian integrated energy
group listed on Indonesia's Stock Exchange, with a market capitalization
of around IDR3.8 trillion ($250 million) as of 15 May 2020.
Its principal investment is a 91% stake in Kideco Jaya Agung (P.T.),
one of Indonesia's largest domestic coal producers.
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
rating and, if applicable, the related rating outlook or rating
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.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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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.
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