Photo: Toba Bara

JAKARTA (TheInsiderStories)  – Moody’s Investors Service has assigned a B3 corporate family rating (CFR) to Toba Bara Sejahtera Tbk (P.T.). At the same time, Moody’s has assigned a B3 rating to the proposed senior secured bond issued by Toba Bara.

The outlook on all ratings is stable.

Toba Bara will use the net bond proceeds to refinance bank debt, fund its
equity contribution in two power projects, and make acquisitions in the
coal mining and power sectors. This is the first time that Moody’s has assigned a rating to Toba Bara.


“Toba Bara’s B3 rating is supported by its track record of maintaining a
solid operating performance through the coal price cycle, supported by
its low-cost operations and steady production volumes,” says Maisam
Hasnain, a Moody’s Analyst.

Toba Bara, through its majority ownership in its three coal subsidiaries,
has maintained solid cost controls and generated positive EBITDA per ton
even during the coal price declines in 2015-2016.

The company also benefits from a logistical advantage, as its three
mining subsidiaries are adjacently located in East Kalimantan within
close proximity to jetties and transshipment points. The three mines
also operate under a joint mine plan which helps maximize consolidated
reserves and capacity for overburden removal.

“However, Toba Bara’s B3 rating is constrained by the modest scale of its
business, with consolidated revenue of around $300 million in 2017,
relative to rated peers and current reliance on dividends from one mine
to service debt at the holding company,” adds Hasnain, also Moody’s lead
analyst for Toba Bara.

As a holding company, Toba Bara is reliant on cash distributions from
subsidiaries to service its debt, and its principal cash flow generating
asset is a 51% stake in PT Adimitra Baratama Nusantara (ABN), which
contributed around 70% of total consolidated revenue in 2017, and has
been the primary cash contributor in recent years. However, Moody’s
expects modest contributions from other mining subsidiaries from 2018.

Toba Bara’s B3 rating also incorporates its evolving acquisition
strategy. The company plans to use around $150 million of its proposed
bond proceeds to make brownfield acquisitions in the coal and power

“We expect the company to remain acquisitive in the near term in order to
increase its coal reserve base and accelerate its growth as coal reserves
at its existing mine sites will be fully mined by 2026 – 2027 ,” adds

Toba Bara’s B3 rating also reflects Moody’s expectation that its two
greenfield power plants will be completed on time and within budget. The
company is developing two 2 x 60 MW gross capacity coal -fired power
plants in Gorontalo and North Sulawesi under 25-year agreements with
Perusahaan Listrik Negara (P.T.) (Baa3 positive) as a single off-taker
under a build, own, operate, transfer (BOOT) scheme.

Once operational, the plants will provide Toba Bara with stable earnings
and a more diversified business profile from 2020-2021. Nevertheless, the
development of the plants — at a cost of around $430 million — raises
execution risk over the next two to three years.

Accordingly, coal sales will remain the predominant contributor to Toba
Bara’s earnings and cash flows over the next few years until the power
projects become fully operational.

Given these large planned capital expenditure and acquisition plans, Toba
Bara’s financial metrics will weaken from their current levels.

“Under Moody’s expectations for Newcastle thermal coal prices to average
$68-$80 per ton, Toba Bara’s adjusted consolidated debt/EBITDA will
increase considerably to 5.0x-6.5x through 2020 from around 1.2x as of 30
September 2017, while holding company interest coverage will fall below
1.0x in the absence of incremental cash flows from planned acquisitions,”
adds Hasnain.

The stable outlook reflects Moody’s expectation that Toba Bara will
effectively execute its growth strategy while maintaining prudent
operating and financial policies, including minimal shareholder returns.

What Could Change the Rating — Up

Upward ratings pressure over the next 12-18 months is unlikely, given
Toba Bara’s current scale and the elevated integration and execution risk
associated with potential acquisitions and the construction of its power

Nevertheless, upward ratings pressure could emerge over time if Toba Bara
improves its business profile though earnings-accretive acquisitions, and
remains on track to complete its power projects on time and within
budget. A track record of acquiring new mines and ramping up production,
while improving its mine reserve life and increasing liquidity at the
holding company, would also be positive for the rating.

What Could Change the Rating — Down

Downward pressure on the rating could emerge if industry fundamentals
deteriorate, leading to a decline in Toba Bara’s ability to generate
free cash flow and grow its business; or if Toba Bara adopts shareholder
return policies that weaken its liquidity or cause it to incur additional

Indicators Moody’s would consider for a downgrade are (1) adjusted
consolidated debt/EBITDA rising above 6.5x; and (2) an adjusted EBIT
margin below 15% on a sustained basis.

In addition, any weakness in debt serviceability at the holding company,
such that interest cover from dividend receipts falls below 1.0x on a
sustained basis would also lead to negative ratings pressure.

Toba Bara Sejahtra Tbk (P.T.), through its majority ownership in three
coal subsidiaries, is an Indonesian thermal coal producer with three
adjacent coal mines with combined annual production volume of around 5
million tons.

As of 01 February 2018, the company was 61.79% owned by
Highland Strategic Holding Pte. Ltd, Singapore-based passive private
investment trust comprised of institutional and high net worth investors.