Fitch Rates Star Energy Geothermal’s USD350M Notes Final ‘B+’ Rating
(The Insider Stories) — Fitch Ratings has assigned Indonesia-based Star Energy Geothermal (Wayang Windu) Limited’s (SEG) USD350m seven-year senior secured 6.125% notes a final rating of ‘B+’ with a Recovery Rating of ‘RR4′.
Key Rating Drivers
The final rating is in line with the expected rating assigned on 10 March 2013 and follows a review of final documentation materially conforming to the draft documentation previously reviewed. The notes are rated at the same level as SEG’s Issuer Default Rating (IDR) of ‘B+’, as they constitute direct, unconditional and senior secured obligations of the company.
Proceeds from the notes are largely to be used to refinance SEG’s existing senior secured USD notes of USD337.5m, of which USD12.5m, USD25m and USD300m are due in 2013, 2014 and 2015 respectively. The refinancing process gives SEG the option of repaying USD85m of its USD102m subordinated shareholder loan immediately and a further USD1m per annum thereafter. Fitch expects the repayment of the shareholder loan to be made out of SEG’s existing cash at hand (USD139m at end-December 2012) and as such does not expect SEG’s total indebtedness to change materially.
While the refinancing exercise improves SEG’s liquidity in the medium-term, leverage - on a net of cash basis - will increase due to the repayment of USD85m of the subordinated shareholder loan. This is because Fitch has not treated the loan as debt due to its subordinated nature and it being interest-free. However, Fitch does not expect SEG’s funds from operations (FFO)-adjusted net leverage to exceed the negative guidance of 5.0x on a sustained basis. This is based on Fitch’s expectation that SEG will generate positive operational cash flows, incur limited maintenance capex and not pay out any substantial dividends in the medium-term. Fitch has also taken into account the company’s scheduled amortisation of the recently completed USD notes issue of USD30m-USD40m per year starting in 2017.
SEG’s ratings reflect geological risks inherent to operating in an active seismic area as well as the high visibility of its earnings. The ratings remain constrained by geological risks, particularly given its single site operation, and by potential heavy capex relative to its balance sheet. On the other hand, the company has demonstrated reliable operating performance, underpinned by its long-term ‘take or pay’ energy sales contract with the state power utility, PT Perusahaan Listrik Negara (BBB-/Stable).
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO-adjusted net leverage exceeding 5.0x (2.4x at end-9M12) and FFO interest coverage falling below 2.0x (1.9x at end-9M12), both on a sustained basis.
Positive: A positive rating action is unlikely in the next 12 to 18 months. However, Fitch may consider a positive rating action once greater clarity is available on SEG’s future capex, on its capital structure and on whether the company can reduce its financial leverage to below 3.5x on a sustained basis.
