JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the B3 corporate family rating (CFR) for PT Bumi Resources Tbk (IDX: BUMI). At the same time, Moody’s has affirmed the B3 rating on the Series A and Caa1 rating on the Series B senior secured notes due 2022 issued by BUMI’ wholly owned subsidiary, Eterna Capital Pte. Ltd., and guaranteed by the miner.

It said, the rater has revised that the outlook on the ratings above to negative from stable.

“The negative ratings outlook reflects our expectation that Bumi’s principal debt repayments will continue to trend lower than our previous expectations,” says Maisam Hasnain, a Moody’s Analyst, on Tuesday (02/19).

Moody’s had initially expected BUMI to repay US$300-$500 million of principal under its Series A notes and Tranche A facilities (collectively referred to as ‘Tranche A’) by the end of 2019, following the completion of Bumi’s debt restructuring in December 2017.

“However, we now expect BUMI to repay only around $220 million of principal by the end of 2019, primarily due to lower-than-expected coal sales volume, working capital challenges, and a price cap on domestic coal sales to electric utilities,” adds Hasnain.

Negative ratings pressure will persist until such time as BUMI can materially improve its cash generation. The company is taking steps to improve this, including reducing outstanding receivables from domestic customers. Bumi also expects its 90 percent owned subsidiary, PT Arutmin Indonesia to start paying it dividends from July 2019.

BUMI’ aggregate debt balance will continue to rise, as the pace of principal repayments on its Tranche A debt slows, eventually leading to an unsustainable capital structure should this continue.

While the coal miner’ annual cash interest payments total only $30-$35 million a year, a majority of its debt has payment-in-kind interest, which is accrued and added to the principal amount of debt should BUMI have insufficient cash to make periodic interest payments on these instruments.

The negative ratings outlook also captures the heightened liquidity risk for Bumi, given large tax prepayments at it 51 percent owned subsidiary, Kaltim Prima Coal (KPC).

Additionally, on Jan. 31, BUMI announced that KPC would prepay its income tax of around $212 million by April the same year, of which, $42 million was prepaid in January 2019. This large cash payment for tax will significantly reduce KPC’ free cash available to make dividends to shareholders in the coming months.

The unit of Bakrie Group is currently solely reliant on dividends from KPC to meet its cash obligations. As a result, Moody’s expects BUMI’ debt repayments to be minimal, while KPC makes its large tax prepayments.

The company has confirmed that it has sufficient cash in its debt service reserve account to meet its cash interest payments for the quarter ended March 2019. BUMI also confirmed KPC has the flexibility of amending the tax prepayment schedule, ensure it provides sufficient cash dividends to the local miner for the parent company to remain current on its cash interest payments.

However, Moody’s is cognizant that BUMI‘ liquidity risk will remain elevated during this period of large tax prepayments, should KPC prove unable to extend its tax prepayment terms or faces unforeseen cost overruns, which constrain its ability to make dividend payments to BUMI.

Upward pressure on the company’ ratings is unlikely, given the negative outlook. Nevertheless, the outlook could revert to stable if BUMI increases its pace of debt reduction such that it has repaid around $300-$400 million of Tranche A principal by the end of 2019, while maintaining prudent financial policies, with a strong adherence to its cash account management agreement.

On the other hand, Moody’s could downgrade the ratings if: (1) Bumi’s ability to generate cash to repay debt remains slower than Moody’s initial expectations; (2) KPC has difficulty prepaying or deferring its large tax prepayments in the coming months; (3) Bumi fails to extend its mining licenses at KPC and Arutmin on substantially similar terms; or (4) a deviation occurs from the stated prudent financial policies, including adherence to the terms of its cash account management agreement.

As we know, Bumi Resources, through its majority-owned subsidiaries, is Indonesia’s largest thermal coal producer. The company produced around 63 million tons of coal for the nine months to 30 September 2018. Its principal assets include a 51 percent stake in KPC and a 90 percent stake in Arutmin Indonesia.

Written by Daniel Deha, Email: daniel@theinsiderstories.com