Moody’s assigns definitive B2 rating to Medco; outlook stable

Medco Energi Issued Bonds of US$650M to Finance Ophir’s Acquisition and Pay Debt
Photo by MedcoEnergi

Singapore — Moody’s Investors Service has assigned a definitive B2 corporate family rating (CFR) to Medco Energi Internasional Tbk (P.T.) (Medco).

At the same time, Moody’s has also assigned a definitive B2 rating to the U$400 million USD-denominated backed senior unsecured bonds issued by Medco Strait Services Pte. Ltd., a wholly-owned subsidiary of Medco. The bonds are irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries. The outlook on the ratings is stable.

RATINGS RATIONALE

Moody’s definitive corporate family rating on Medco and rating on its bonds follows the company’s completion of its USD bond issuance, the final size, terms and conditions of which are consistent with Moody’s expectations. The provisional ratings were assigned on 28 July 2017.

The net proceeds from bonds of about $383 million, including the proceeds from the tap, will be used to fund interest reserve account of about $17 million, repay the outstanding loan for its Natuna project of $220 million and repay the outstanding SGD bonds of $72 million. The remaining proceeds of about $74 million will be kept in an escrow account for
repayment of other debt maturing over the next 12 months.

The amount in escrow account along with cash and short term investment of $246 million as of June 2017 and expected free cash flow (excluding capex on Block A) of about $50-100 million over the next 12 months will be sufficient to cover the amount of debt maturing over the next 12 months of $351 million.

The company has executed a long term facility of $360 million to fund its capex on Block A. The company also has undrawn committed facilities of $50 million as of June 2017.

Even though the liquidity position for next 12-18 months is adequate, the company will have about $400 million of debt maturing in each of 2019 and 2020, which will expose to company to refinancing risks unless the debt reduction plan of the company is executed.

The stable outlook incorporates the expectation that production growth from Medco’s existing fields will improve cash flows and company will remain committed to deleveraging, such that its credit metrics will remain appropriate for its ratings over the next 12-18 months.

The ratings will be downgraded if a) liquidity profile weakens such that cash and cash equivalents along with expected free cash flows is unable to cover the debt maturing over the next 12 months, or b) if credit metrics weaken because of a decline in oil prices or production volumes or because of failure to reduce debt, or any material debt-funded
acquisitions. Ratings will also face downward pressure if Medco provides funding support to its mining or power businesses.

Credit metrics indicative of downward pressure on ratings include adjusted debt/ EBITDA increasing above 5.5x, RCF/ adjusted debt falling below 10%, and EBITDA/interest expenses falling below 3x.

Upward pressure on the ratings over the next 12-18 months is limited pending the completion of debt reduction plan. The ratings could be upgraded after completion of the debt reduction plan if a) adjusted debt/EBITDA falls below 4.5x, RCF/adjusted debt increases above 15%, and EBITDA/interest expenses increase above 4x. Ratings upgrade will also require that cash and cash equivalents cover at least the amount of debt
maturing over the next 12 months, all on a sustained basis.

Established in 1980 and headquartered in Jakarta, Medco Energi Internasional Tbk (P.T.) (Medco) is predominantly an oil and gas exploration and production (E&P) company with additional operations in downstream oil and gas activities, power generation, and copper, gold and coal mining.

Medco reported proved developed reserves of 136.6 mmboe as of 31 March 2017, and oil and gas production volumes of 64.1 mboepd (excluding service contracts) for twelve months ended 31 March 2017.

Medco has been listed on the Jakarta Stock Exchange since 1994. It is 35.7% owned by Encore Energy Pte. Ltd. (unrated), 20.7% by Clio Capital Ventures (unrated), and 10% by Mitsubishi Corporation (A2 negative). 26.3% of Medco is publicly owned, with the balance owned by other
investors.