Moody's Investors Service has affirmed the Ba3  corporate family rating of PT Indika Energy Tbk (IDX: INDY) - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed the Ba3  corporate family rating of PT Indika Energy Tbk (IDX: INDY). The agency also affirmed the Ba3 ratings on the US$285 million backed senior secured notes due 2023 issued by Indo Energy Finance II B.V., the $265 million backed senior secured notes due 2022 issued by Indika Energy Capital II Pte. Ltd, and the $575 million backed senior secured notes due 2024 issued by Indika Energy Capital III Pte. Ltd.

All notes are unconditionally and irrevocably guaranteed by Indika and rank pari passu. Moody’s has also revised the outlook on these ratings to negative from stable.

The agency also affirmed the B1 corporate family rating of PT ABM Investama Tbk (IDX: ABMM) and the B1 rating on its $350 million senior unsecured notes due 2022. At the same time, Moody’s has revised the outlook on these ratings to negative from stable.

“The change in Indika’ outlook to negative from stable reflects our expectation that its credit metrics will deteriorate over the next 12 months, amid a challenging operating environment including weak thermal coal prices. At the same time, the affirmation of Indika’s Ba3 ratings reflects its diversified operations, large cash balance with manageable near-term debt maturities, and an adherence to prudent financial policies,” says Maisam Hasnain, a Moody’s Assistant Vice President and Analyst.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

More specifically, Indika is exposed to weak thermal coal prices, which are likely to remain low over the next 12 months as the coronavirus-led economic downturn reduces demand for thermal coal. Today’ action reflects the impact on Indika of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Based on its medium-term price assumptions for Newcastle thermal coal of $60 – $65 per ton, Moody’s estimates Indika’ adjusted leverage will increase to 5.2x – 6.5x over the next 12 – 18 months from 3.5x as of Dec. 31, 2019. The earnings contraction will primarily be driven by lower earnings at its 91 percent-owned mining subsidiary, PT Kideco Jaya Agung, due to lower coal prices.

The unit is the largest earnings contributor, accounting for 52 percent of Indika’ reported revenue in 2019. In addition, in light of weak coal prices and slowing economic growth, the downside risk to the miner’ credit metrics worsening beyond Moody’s current expectations is elevated, particularly if its sales volume declines this year, or if prices remain low for a prolonged period.

Earnings growth will also be muted at Indika’ contract mining subsidiary PT Petrosea Tbk (IDX: PTRO) and engineering subsidiary PT Tripatra Multi Energi, which contributed 16 percent and 15 percent of consolidated revenue in 2019. The contract order book for both subsidiaries has been declining in recent years, and given low prevailing energy prices, the likelihood of winning new contracts this year is low.

Indika has sufficient liquidity to meet its cash needs for the next 12 – 18 months, and Moody’s expects the company will continue to proactively refinance its debt maturities well ahead of its large $1.1 billion debt maturity wall between 2022 and 2024. its large consolidated cash balance of around $569 million as of 31 December 2019 affords it flexibility to manage volatility in its operations amid low coal prices.

ABM Investama

According to Hasnain, the affirmation of ABM’ ratings reflects its integrated operations, which support its operating performance through cost synergies and its adequate liquidity with no material near-term debt maturities. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

The combined credit effects of these developments are unprecedented. More specifically, ABM is exposed to weak thermal coal prices, which are likely to remain low over the next 12 months as the coronavirus-led economic downturn reduces demand for thermal coal.

Based on its medium-term price assumptions for Newcastle thermal coal of $60 – $65 per ton, Moody’s estimates that, as a result of weak earnings and cash flow, ABM will maintain adjusted EBIT/interest of around 1.3x and adjusted (CFO-dividends)/debt of around 17% over the next 12-18 months. This would be in breach of the downward rating triggers for its B1 ratings of 2.0x and 20 percent, respectively.

The earnings contraction will primarily be driven by lower earnings at its wholly owned mining subsidiary, PT Reswara Minergi Hartama, due to lower coal prices. Reswara, with three operating mines, is the largest earnings contributor, accounting for around half of ABM’ reported revenue in 2019.

The unit’ coal is produced predominantly through PT Mifa Bersaudara (MIFA) which produced 7.1 million tons in 2019. ABM is increasing production at its MIFA mine to compensate for the declining production at its PT Tunas Inti Abadi (TIA) mine, which produced four million tons in 2019 and will likely run out of coal reserves by 2022.

However, MIFA has a short track record of ramping up volumes, which will lead to execution risk. Also, MIFA’s coal has lower calorific value than TIA’ and is sold predominantly to India. Thus, any material reduction in Indian coal imports will reduce MIFA’s coal sales.

In light of weak coal prices and slowing economic growth, the downside risk to ABM’s credit metrics worsening beyond Moody’s current expectations is elevated, particularly if ABM’s sales volume declines this year, or if coal prices remain low for a prolonged period. There is also uncertainty over the financial health of the external customers for ABM’s mining services business, operated by its subsidiary PT Cipta Kridatama.

Most of these customers are private companies with limited public information, and their ability to maintain profitable operations amid weak coal prices is relatively untested. ABM has sufficient liquidity to meet its cash needs for the next 12 – 18 months, with no significant debt maturities until August 2022, when its $350 million bond comes due. Moody’s expects ABM to refinance its bond well ahead of maturity date. A material reduction in its cash balance of around $102 million as of Dec. 31, 2019 would likely lead to a downgrade.

Indika Energy is an Indonesian integrated energy group listed on Indonesia Stock Exchange, with a market capitalization of around Rp3.8 trillion ($250 million) as of May 15, 2020. Its principal investment is a 91 percent stake in Kideco, one of Indonesia’

While ABM is an integrated energy company with investments in coal mining, mining services, engineering and logistics, and power generation. The Hamami family controls 79 percent of the company through PT Tiara Marga Trakindo (23 percent) and Valle Verde Pte. Ltd., (56 percent). The remaining shares are held by the public.

Edited by Staff Editor, Email: theinsiderstories@gmail.com