JAKARTA (TheInsiderStories) – Moody’s Investors Service says that ABM Investama Tbk (P.T.)’s (Ba3 negative) plan to acquire a minority stake in an affiliated Indonesian thermal coal producer, should the transaction proceed, is credit negative but can be accommodated within its Ba3 ratings and negative outlook.
On Jan. 16, the company announced that it was seeking consent from bondholders to amend its bond indenture to allow for a US$60 million carve out under its permitted investment clause. ABM plans to utilize this amount to fund its investment in the target
According to the miner, the target company is located in East
Kalimantan, with coal production of around seven million tons in 2018, and estimated coal reserves of around 100 million tons at a calorific value of 5,500 to 6,000 kcal/kg.
ABM has sufficient liquidity to fully fund its investment with internal
cash sources, holding cash and cash deposits of $164 million as of Sept. 30, 2018.
“However, the proposed $60 million investment, once complete, will weaken ABM’s available liquidity buffer. Such reduced liquidity could weaken the company’s plans to fund a separate new acquisition, in this case, a majority stake in another coal mine, to supplement its depleting coal reserves,” says Maisam Hasnain, a Moody’s Analyst in a written statement.
ABM had planned to acquire a majority stake in a mine with similar coal quality and in proximity to its primary producing mine, Tunas Inti Abadi. While it remains committed to this strategy, its target to
complete this acquisition by the end of 2018 is now delayed and its
ability to fund it without undue reliance on debt, is reduced.
Moody’s estimates coal reserves at Tunas Initi Abadi will deplete by 2021, prior to the maturity of ABM’s $350 million bond due August 2022. The targets had around 15 million tons of estimated reserves as of September 2018.
“ABM’s business profile will weaken as TIA’s coal reserve continues to decline and as uncertainty continues over the company’s ability to
acquire suitable coal assets to increase production and extend its
limited mine reserve life,” adds Hasnain, also Moody’s lead analyst for the company.
Over the near-term, ABM will focus on entering into service agreements with the target company. Its subsidiaries are involved across multiple stages of the coal supply chain and could derive additional revenue and earnings from these agreements. According to ABM, its investment in the target company is subject to it obtaining service agreements that provide a minimum level of revenue and earnings.
Given operational challenges at its existing businesses, including higher operating costs at its mining and mining services segments, should the transaction proceed to completion, ABM will rely on the new service contracts with the target company to support its earnings. However, an inability to generate incremental earnings from such contracts will lead to further negative rating pressure.
Moody’s also notes that, by purchasing only a minority stake, ABM’s
influence on operational, financial and dividend policies at the target
company will be limited. As the target company is an affiliate company, ABM must satisfy certain requirements, including providing a fairness opinion to the regulators and bondholders.
The publicly listed firm estimates this opinion will be ready by early March, following which it expects to complete its investment by the end of March. The negative ratings outlook reflects ABM’s weakening business profileand operational challenges at its core operations, as TIA’s reserve life declines, and as the uncertainty continues to mount over ABM’s ability to acquire suitable coal assets to increase production and extend its limited mine reserve life.
On the other hand, Moody’s could downgrade the ratings if: (1) the
company is unable to rectify its operational challenges/fails to improve consolidated earnings and cash flow; or (2) ABM fails to extend its mine life in the near term and/or increase its coal production volumes; or (3) there is evidence of cash leakage to its unrestricted power subsidiary, PT Anzara Janitra Nusantara.
Listed on the Indonesian Stock Exchange since 2011, ABM Investama Tbk (P.T.) is an integrated energy company with investments in coal mining, mining services, engineering and logistics, and power generation.
The Hamami family controls 78 percent of ABM through PT Tiara Marga Trakindo (23 percent) and Valle Verde PTE LTD (56 percent). The remaining shares are held by the public.
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