Photo: MedcoEnergi

Singapore — Moody’s Investors Service has affirmed the B2 corporate family rating (CFR) of Medco Energi Internasional Tbk (P.T.) (Medco).

Moody’s has also affirmed the B2 rating on the $400 million backed senior
unsecured bonds issued by Medco Strait Services Pte. Ltd., a wholly-owned
subsidiary of Medco.

Moody’s has revised the outlook on Medco and Medco Strait Services Pte.
Ltd. to positive from stable. At the same time, Moody’s has assigned a B2 rating to the proposed USD-denominated backed senior unsecured bonds to be issued by Medco Platinum Road Pte. Ltd., a wholly-owned subsidiary of Medco.

The proposed bonds are irrevocably and unconditionally guaranteed by Medco and some of its subsidiaries. The outlook on Medco Platinum Road Pte. Ltd. is positive.


“The change in the ratings outlook to positive reflects our expectations that Medco’s credit metrics will continue to improve over the next 12 months, underpinned by a combination of strong cash flow generation from its oil and gas business and the company’s debt reduction plan,” says Rachel Chua, a Moody’s Assistant Vice President and Analyst.

Moody’s expects that Medco’s adjusted net debt/EBITDA (net of cash in escrow earmarked for debt repayment) will be around 4.5x in 2017 and
further improve to 4.0x-4.2x over the next 12 months from 6.7x in 2016.

For 2018, its EBITDA interest coverage will be around 4x and retained cash flow (RCF) to adjusted net debt at 16%.

Moody’s projections incorporate expectations that Medco’s oil and gas sales volume in 2018 will be maintained at around 80 thousand barrels of oil equivalent per day (excluding service contracts), thereby supporting EBITDA generation of $440-$460 million compared to $294 million in 2016.

Moody’s also expects management to continue to deliver on its deleveraging
plan, such that adjusted net debt declines by around 4% in 2018.

Medco’s B2 CFR takes into account the company’s modest but improving
scale of production, as well as its reserves of oil and natural gas, which are in various stages of production and development.

The rating also reflects a modest degree of visibility on Medco’s cash flow coming from fixed-price natural gas sales agreements, which will account for 25%-30% of the company’s total production volume over the next 2-3 years.

At the same time, the rating remains constrained by Medco’s weak but
improving leverage and liquidity profiles, exposure to the cyclicality of
commodity prices, as well as execution risk associated with its
investment plan of around $1 billion over the next four years.

“The positive ratings outlook reflects Medco’s improved liquidity
profile, following its successful rights issuance exercise in December
2017,” adds Chua, who is also Moody’s Lead Analyst for Medco. “The net
proceeds of $195 million will be used for debt repayment over the next
few months; thereby alleviating liquidity pressures.”

Alongside the rights issuance, Medco has also issued warrants that
shareholders can exercise in 2018-2020, which should bring in equity
proceeds of around $200 million.

As of 30 September 2017, Medco had cash and cash equivalents of $450
million compared to $300 million of debt maturing over the next 12
months. Moody’s believes its cash balance, proceeds from its rights
issuance and operating cash flow generation will sufficiently fund the
company’s capital investment plan and debt maturities through 2018.

Moody’s continues to assume that Medco will not provide financial support
in the form of equity injections, shareholder loans or loan guarantees to its power and mining companies. Moody’s also does not expect meaningful dividend contribution from these businesses over the next 2-3 years.

The $375 million acquisition loan at Medco’s 41.1%-owned, mining associate, Amman Mineral Nusa Tenggara (AMNT), which was partly guaranteed by Medco was fully prepaid in December 2017. As such, Medco no longer guarantees any of AMNT’s loans.

Medco’s CFR could be upgraded after the completion of its debt-reduction
plan, if the company’s: (1) adjusted debt/EBITDA falls below 4.5x, RCF/adjusted debt increases above 15%, and EBITDA/interest expense
increases above 4.0x; or cash and cash equivalents cover at least the
amount of debt maturing over the next 12 months, all on a sustained basis.

Given the positive outlook, a rating downgrade is unlikely.

Nonetheless, the rating outlook could be revised to stable if Medco: (1) fails to execute its deleveraging plan, or if there are material delays in implementation; (2) makes any material debt-funded acquisitions before
completion of the debt reduction exercise; or (3) provides funding support to its mining or power businesses.

Specific credit metrics that Moody’s would consider to revise the outlook
to stable include adjusted debt/EBITDA between 4.5x-5.5x, RCF/adjusted
debt between 10%-15%, and EBITDA/interest expense below 4x.

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

Medco reported proved developed reserves of 169.4 million barrels of oil
equivalent (mmboe) at 30 September 2017, and oil and gas production
volumes of 80 thousand barrels of oil equivalents per day (mboepd)
(excluding service contracts) for the nine months ended 30 September 2017.