The following is statement from Fitch on Indika Energy ratings:
Fitch Ratings-Singapore-22 July 2013: Fitch Ratings has revised Indonesia-based Indika Energy Tbk's (Indika) Outlook to Stable from Positive. At the same time the agency has affirmed Indika's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+'. Indika's senior unsecured notes have also been affirmed at 'B+' with a Recovery Rating of 'RR4'.

The Outlook revision reflects weakened dividend flows to Indika from its coal-related operations as a result of a downturn in the thermal coal market. It also takes into account Fitch's expectation that thermal coal prices are unlikely to materially improve in the next 18 to 24 months.

KEY RATING DRIVERS

Weak coal industry: Fitch expects dividend inflows from PT Kideco Jaya Agung (Kideco), its main coal-producing asset in which Indika has a 46% stake, will decline substantially from 2013 due to lower coal prices. As a holding company, Indika relies on dividends from Kideco and other business operations, most of which are related to the coal industry. Dividends from Kideco were USD207m in 2012, accounting for 63% of Indika's consolidated EBITDA. Fitch expects Kideco's dividends to fall below USD100m from 2014 unless there is a material improvement to coal prices.

Structural subordination of cash flows: Dividends from Kideco have historically been the key cash inflow to the holding company, and the expected decline in dividends could result in negative free cash flows at the holding company level from 2014 onwards. Dividend cash flows from its two largest subsidiaries, PT Petrosea Tbk (Petrosea) and PT Mitrabahtera Segara Sejati Tbk, which are 69% and 51% owned respectively by Indika, are also structurally subordinated.

Integrated business model: Indika's integrated coal operations somewhat limit the volatility of its earnings stemming from its commodity exposure. Earnings of Indika's mining sub-contractor subsidiary Petrosea are mainly based on long-term contracts, mostly with fixed prices and fuel-price pass-through mechanisms. Fitch, however, expects a short-term reduction in earnings at Petrosea as coal miners shift mining operations to areas which require lower overburden removal to curtail production costs amid low coal prices. Sub-contracted mining accounted for about 40.2% of Indika's consolidated adjusted EBITDA in 2012.

Adequate liquidity underpins Stable Outlook: Despite Fitch's expectation of weaker cash inflows to Indika, the agency views Indika's liquidity as adequate. Indika intends to retire about USD230m of its 2016 bonds issued in 2009 in November this year from cash on hand. Its next bond maturity is in 2018. At end-March 2013, USD1bn of the total consolidated debt of USD1.31bn was held at the holding company. At the same time, over 80% of the total USD653m of consolidated cash reserves were also held at Indika and are sufficient, even after the early repayment of the 2016 notes, to cover the potential negative cash generation over the next two to three years.

Forecast credit metrics appropriate for current ratings: The Stable Outlook also reflects Fitch's expectation of Indika maintaining a credit profile appropriate for its ratings despite weaker-than-expected dividend flows from Kideco. Fitch expects Indika's adjusted debt net of cash/operating EBITDAR (including dividends from Kideco) to be sustained at around 2x (1.86x in 2012), aided by a curtailment of expansionary capex and acquisitions. Fitch also does not expect coal prices to see material downside from current prices, which are causing many global seaborne coal producers to be unviable.