Moody's assigns Ba3 to BUMA's proposed US dollar notes

(Singapore, January 22, 2021) -- Moody's Investors Service has assigned a Ba3 rating to Bukit Makmur Mandiri Utama (P.T.)'s (BUMA) proposed US dollar senior secured notes.

The rating outlook is negative.

BUMA will use the net proceeds from the notes to fully repay its outstanding bank loans, and use the remaining proceeds to redeem a portion of its outstanding US dollar notes.

RATINGS RATIONALE

"Although BUMA's internal cash sources will be sufficient to meet all of its cash needs through December 2021, proceeds from the proposed notes are essential to alleviating refinancing risk of its US dollar notes maturing in February 2022," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

The Indonesian mining contractor had $337 million of US dollar notes and $57 million outstanding of bank loans as of 31 December 2020. Moody's estimates BUMA's cash balance as of 31 December 2020 was around $100 million.

The proposed notes are currently rated in line with BUMA's Ba3 corporate family rating (CFR) because Moody's expects the notes to constitute the majority of BUMA's debt over the next 12-18 months. The notes will also be issued by BUMA, which is a pure operating company with no subsidiaries. Both of these factors mitigate subordination risk.

However, BUMA's proposed notes could be notched down from its CFR in the future if secured bank debt constitutes a majority of its consolidated debt, or if the preponderance of its consolidated claims are at future non-guarantor subsidiaries.

In January, Souls Humanity Pte. Ltd. (SHPL), a private company controlled by Ashish Gupta and Ronald Sutardja (BUMA's President Director), acquired an effective 16.7% stake in BUMA from an existing shareholder consortium comprising Northstar Equity Partners, TPG Capital, GIC Pte. Ltd. and China Investment Corporation. There is also an option for SHPL to purchase the remaining stake held by the consortium, which would take SHPL's effective shareholding in BUMA to around 37.9%, making it BUMA's largest effective shareholder.

As a result, some uncertainty remains regarding the ultimate ownership of BUMA, which gives rise to governance risks. To that end, BUMA's ratings would likely be downgraded if the changes in its effective shareholding result in liquidity pressure, delays in its refinancing plans or causes a shift from its current financial policies, which include prioritizing positive free cash flow generation and limited shareholder returns.

At the same time, BUMA's Ba3 CFR continues to reflect its (1) position as Indonesia's second-largest coal mining services contractor by overburden volume, with a well-recognized franchise and established relationships with some of Indonesia's largest coal miners; and (2) track record of resilient operating performance and proactive capital management through industry downturns.

BUMA's CFR is also constrained by its (1) high level of customer concentration, namely with Berau Coal (P.T.); (2) geographic concentration in Indonesia; and (3) exposure to the cyclical nature of the thermal coal sector.

"The negative outlook reflects the company's sizeable near-term refinancing risk associated with its maturing bank loans and notes, uncertainties around its ownership composition and future financial policies, and execution risk regarding the company's growth plans," adds Hasnain, also Moody's Lead Analyst for BUMA.

The ability to sign new customer contracts will be critical for BUMA to maintain its credit quality over the next two to three years, in order to prevent a reduction in scale and an increase customer concentration risk, following a material reduction in overburden removal volume in 2020.

BUMA's recent announcement of a large contract extension with PT Indonesia Pratama, a subsidiary of Bayan Resources Tbk (P.T.) (Ba3 stable) is credit positive because it will help the mining contractor offset some lost volumes following the non-renewal of a key customer contract in 2020. BUMA has also tendered for two large coal mining service contracts and expects the tender results to be announced within the first half of 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Moody's could downgrade the ratings if (1) BUMA is unable to raise sufficient funds with its proposed US dollar notes to eliminate near-term refinancing risk while maintaining an adequate liquidity buffer; (2) its underlying financial policies were to change materially as a result of a change in shareholding; (3) it is unable to win new contracts, or if its expiring contracts are not renewed on similar or enhanced terms; (4) it experiences declining earnings or profitability; or (5) payments from its largest customer Berau Coal are delayed, such that the average days for payment collection exceed 65 days.

Credit metrics indicative of a downgrade include BUMA's adjusted debt/EBITDA staying above 3.5x, retained cash flow/net debt staying below 20%, or EBITA/interest expense staying below 2.0x, on a sustained basis.

An upgrade of BUMA's ratings is unlikely over the next 12-18 months, given the negative outlook. However, Moody's could revise the outlook to stable if (1) BUMA improves its liquidity and addresses its near-term debt maturities, including its US dollar bond due February 2022; (2) it wins new mining service contracts to grow overburden removal volumes, without weakening its credit metrics or materially increasing execution risk, and (3) there is clarity that the changes in its shareholding composition will not weaken BUMA's credit profile.

In addition to having sufficient cash sources to meet its cash needs over the next 12 months, specific indicators that Moody's would consider for a change in outlook to stable include BUMA's adjusted debt/EBITDA staying below 3.25x and retained cash flow/net debt staying above 25%, on a sustained basis.

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1998, Bukit Makmur Mandiri Utama (P.T.) (BUMA) is a coal mining services contractor in Indonesia, providing open-cut mining services to some of the country's largest coal producers.

BUMA is 100% owned (less one share) by PT Delta Dunia Makmur Tbk, an investment holding company listed on the Indonesia Stock Exchange, which, in turn, is 38% owned by an international consortium through Northstar Tambang Persada Ltd, comprising Northstar Equity Partners, TPG Capital, GIC Pte. Ltd., China Investment Corporation, and Souls Humanity Pte. Ltd. The remaining 62% stake in Delta is held by public and institutional investors. (ends)