JAKARTA (TheInsiderStories) – Moody’s Investors Service has assigned a Ba1 corporate family rating (CFR) to PT Adaro Indonesia (AI). In addition, Moody’s has assigned a Ba1 rating to the proposed US Dollar senior notes to be issued by the company, which will be guaranteed by its parent PT Adaro Energy Tbk (IDX: ADRO).
The proposed notes are unsecured and will effectively rank pari passu with AI’ existing bank debt. The ratings outlook is stable.
The miner will use the notes’ net proceeds to repay existing debt, fund capital spending, and for general corporate purposes. AI’ Ba1 rating reflects the credit quality of its parent, given the strong operational links between the two companies.
These include Adaro Energy holding the largest stake in AI at 88.5 percent, AI benefiting from its parent’ vertically integrated operations across the coal supply chain, and Adaro Energy guaranteeing all of its unit’ debt.
“Adaro Energy’ credit quality is supported by AI, which is its key subsidiary and one of the largest single location coal producers in the southern hemisphere, with substantial thermal coal reserves, low operating costs, and solid profitability through the coal price cycles,” says Maisam Hasnain, a Moody’s Assistant Vice President and Analyst in an official statement today (10/15).
Adaro Energy‘ thermal coal business has a long track record of stable operations with annual production of around 50 million tons since 2013, making it the second largest coal producer by volume in Indonesia. The thermal coal operations are supported by an integrated supply chain covering mining contracting, transportation, port operations and power generation.
The integrated supply chain helps the group improve its operating efficiency, maintain cost controls and reduces reliance on third-party vendors. the company’ credit profile is also supported by its adherence to conservative financial policies.
Over the last 10 years, its long-term average adjusted leverage — as measured by adjusted debt/EBITDA — has been low, hovering around 2.0x. Moody’s expects Adaro Energy to maintain similar leverage levels over the next 2-3 years.
The coal miner also has a record of prefunding or prepaying its debt well ahead of maturity. For example, in 2014, AI refinanced its US$800 million notes issued in 2009 with a syndicated loan, five years ahead of scheduled maturity.
“At the same time, Adaro Energy’ credit quality is constrained by its limited operational and geographic diversification, keeping the group reliant on thermal coal sales to drive the majority of revenue and earnings over the next few years,” adds Hasnain.
However, the company own by Thohir family has taken steps to diversify its earnings, as reflected in its investments in two Indonesian power projects, which are scheduled to start by the end of 2019 and 2020 respectively. In addition, the company purchased an effective 35 percent stake in Kestrel Coal Mine, an Australian metallurgical coal producer, in 2018.
Moody’s estimates that dividends from these entities are likely to be minimal over the next 2-3 years. As such, Adaro Energy‘ credit profile will continue to be driven primarily by its thermal coal operations in South Kalimantan, exposing the group to a high degree of operational and geographic concentration risk.
The Ba1 ratings also reflect Moody’s expectation that AI’ coal contract of work (CCoW) mining license, which expires in October 2022, will be extended on broadly similar terms. However, Moody’s believes that there remains a high degree of regulatory risk, given limited clarity from the Government of Indonesia (Baa2 stable) on the extension or conversion of such mining licenses.
Moody’s expects Adaro Energy will maintain strong liquidity over the next 12-18 months with sufficient cash to meet its needs until Dec. 31, 2020. The proposed notes will further strengthen its liquidity and help address its cash needs through 2021, including scheduled debt maturities and capital spending.
The proposed notes are rated in line with AI’ Ba1 CFR. Legal subordination risk for bondholders is mitigated as the proposed notes will effectively rank pari passu with AI’s existing bank loans, which are also unsecured. Structural subordination risk is mitigated as AI is an operating company, generating the majority of the parent’ revenue.
The rating also considers Adaro Energy’ exposure to environment social and governance risks. First, Adaro Energy faces elevated environmental risks associated with the coal mining industry, including carbon transition risks as countries seek to reduce their reliance on coal power.
However, Adaro Energy is better positioned than other global coal miners to manage these risks, given its 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 its better coal quality, with low ash and sulfur content.
Second, Adaro Energy is also exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. The company pursues a “zero mine site accidents” goal at its mines. It also sponsors corporate social responsibility projects through the Adaro Foundation, and runs programs to supply clean water to local communities through Adaro Water.
Third, with respect to governance, Adaro Energy’ ownership is concentrated in its major shareholders, who directly and indirectly own 64 percent of the company. However, this risk is balanced against Adaro Energy’ listed status, supportive shareholders and long track record of maintaining prudent financial policies.
The stable outlook reflects Moody’s expectation that Adaro Energy will effectively execute its growth strategy while continuing to adhere to conservative financial policies. Upward rating pressure over the next 12-18 months is unlikely, given the miner’ lower scale and limited product diversification compared with similarly rated mining peers.
Nevertheless, Moody’s could upgrade the ratings if ADRO materially improves its business profile through product and geographic diversification, while adhering to conservative financial policies and maintaining a prudent approach towards further investments and shareholder distributions.
Moody’s could downgrade the ratings if Adaro Energy experiences operational disruptions or industry fundamentals weaken, such that its earnings and cash flow decline, AI fails to extend its CCoW on similar terms, or Adaro Energy engages in aggressive shareholder distributions or capital investments, which would indicate a deviation from its stated prudent financial policies.
Specifically, adjusted debt/EBITDA above 3.0x or adjusted EBIT/interest below 4.0x on a sustained basis could prompt a review for downgrade.
Adaro Indonesia is one of the largest single-site coal producers in the southern hemisphere, and one of the world’s largest sub-bituminous coal companies. AI is 88.5 percent owned by its parent, an integrated energy group listed on the Indonesia Stock Exchange with a market capitalization of around Rp41.6 trillion ($2.9 billion) as of Oct. 14, 2019.
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