JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded the corporate family rating (CFR) for PT Bumi Resources Tbk (IDX: BUMI) to Caa1 from B3. At the same time, Moody’s has downgraded the ratings on the senior secured notes due 2022 issued by its wholly owned subsidiary, Eterna Capital Pte. Ltd., guaranteed by the miner.
Specifically, the agency has downgraded the Series A notes to Caa1 from B3 and the Series B notes to Caa2 from Caa1. The ratings outlook remains negative.
“The downgrade reflects BUMI’ rising debt burden due to the slow pace of its principal repayments and the compounding effect of payment-in-kind interest for the majority of its debt, resulting in an increasingly strained capital structure,” says Maisam Hasnain, a Moody’s Analyst in the latest report.
Since its debt restructuring in December 2017, Moody’s estimates BUMI has repaid around US$200 million of principal under its Series A notes and Tranche A facilities as of the end of 2019, considerably lower than Moody’s initial expectation of around $300 million to $500 million repayment over this period.
This slower-than-expected pace of debt reduction has primarily been driven by declining coal prices, a price cap on domestic coal sales to electric utilities since 2018, and dividends being received from only one of its two major coal mining subsidiaries instead of both.
As a holding company, BUMI is reliant on dividends from subsidiaries, primarily its 51 percent-owned subsidiary, PT Kaltim Prima Coal (KPC), to service its debt. The company’ 90 percent-owned unit, PT Arutmin Indonesia has yet to pay dividends, but the Bakrie-owned company expects it to start paying dividends in the second half of 2020.
Still, Arutmin has certain outstanding liabilities it needs to pay off before it can initiate dividend payments. Assuming benchmark Newcastle thermal coal price of $65 – $70 a metric ton (MT), Moody’s expects the miner to continue to meet the approximate $30 million annual cash interest payments on Tranche A along with around $35 million in Tranche A principal in 2020.
However, BUMI will remain current on its cash interest payments, the majority of its debt carries payment-in-kind interest, which is accrued and added to the principal amount of debt.
“As a result, we expect BUMI’ aggregate reported debt balance of around $1.8 billion as of January 2020 will continue to rise, leading to an unsustainable capital structure as its debt maturities approach in December 2022,” adds Hasnain.
In January, the Bakrie Group unit announced that due to the Indonesian government restricting coal production in 2020, it only obtained approval to produce 76 million MT of coal during this year across its two mines, a decline from the 86 million tons it produced in 2019.
As a result, while the company will have sufficient cash to cover overheads and cash interest payments, it will not be able to repay any principal on Tranche A during the first quarter ending March 2020. The company expects its production quota to be increased by the government in 2Q 2020. Any inability to obtain additional production quota will further dent cash generation and ultimately slow the pace of any principal repayments.
Moody’s also expects the coal contract of work (CCoW) mining licenses at Arutmin and KPC, which expire in November 2020 and December 2021 respectively, will be extended on broadly similar terms. The agency believes there remains a high degree of regulatory risk, given limited clarity from the government (Baa2 stable) on the extension or conversion of such mining licenses.
BUMI’ Series B senior secured notes are rated one notch lower than the miner’ CFR and its Series A senior secured notes to reflect its relative subordination as per the terms of the cash waterfall, whereby interest on Series B notes will only be paid once the principal on Series A is fully repaid.
Finally, in terms of governance risks, Moody’s has considered the miner complex organizational structure and history of debt restructuring. The presence of KPMG Services Pte. Ltd. as an independent monitoring accountant and the waterfall mechanism under a cash account management agreement helps provide protection to lenders in ensuring greater transparency in cash movements and prioritizing payments towards debt servicing.
The negative outlook reflects Moody’s expectation that in the absence of a material improvement in cash generation, BUMI‘ aggregate debt balance will continue to rise, eventually leading to an unsustainable capital structure. Upward pressure on Bumi’s ratings is unlikely, given the negative outlook.
Moody’s said, could downgrade the ratings if the company’ ability to generate cash to repay debt remains low over the next 12 months such that it is unlikely to meet its scheduled maturities by December 2022, fails to extend its mining licenses at KPC and Arutmin on substantially similar terms, and does not adhere to the terms of its cash account management agreement.
Bumi Resources, through its majority-owned subsidiaries, is the country’ largest thermal coal producer. The company produced around 86 MT of coal in 2019. Its principal assets include a 51 percent stake in KPC and a 90 percent stake in Arutmin.
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