Moody's downgrades Bumi Resources to Caa1; outlook remains negative

(Singapore, March 23, 2020) -- Moody's Investors Service has downgraded the corporate family rating (CFR) for Bumi Resources Tbk (P.T.) (Bumi) to Caa1 from B3.

At the same time, Moody's has downgraded the ratings on the senior secured notes due 2022 issued by Bumi's wholly owned subsidiary, Eterna Capital Pte. Ltd., and guaranteed by Bumi. Specifically, Moody's has downgraded: (1) the Series A notes to Caa1 from B3, and (2) the Series B notes to Caa2 from Caa1.

The ratings outlook remains negative.

RATINGS RATIONALE

"The downgrade reflects Bumi's 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 Assistant Vice President and Analyst.

Since its debt restructuring in December 2017, Moody's estimates Bumi has repaid around $200 million of principal under its Series A notes and Tranche A facilities (collectively referred to as 'Tranche A') as of the end of 2019, considerably lower than Moody's initial expectation of a $300-$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%-owned subsidiary, Kaltim Prima Coal (P.T.) (KPC) - to service its debt. Bumi's 90%-owned subsidiary, Arutmin Indonesia (P.T.) has yet to pay dividends, but Bumi 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 per ton, Moody's expects Bumi 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, while 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's 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, also Moody's Lead Analyst for Bumi.

In January, Bumi announced that due to the Indonesian government restricting coal production in 2020, it only obtained approval to produce 76 million tons 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.

Bumi 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. However, Moody's believes that there remains a high degree of regulatory risk, given limited clarity from the Government of Indonesia (Baa2 stable) on the extension or conversion of such mining licenses.

Bumi's Series B senior secured notes are rated one notch lower than Bumi's 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.

The ratings also consider Bumi's exposure to environmental, social and governance (ESG) risks as follows:

First, Bumi faces elevated environmental risks associated with the coal mining industry, including carbon transition risks as countries seek to reduce their reliance on coal power. However, this risk is somewhat mitigated as Bumi's customers are primarily located in Asia, a region with growing energy needs.

Second, Bumi is exposed to social risks associated with the coal mining industry, including health and safety, responsible production, and societal trends. While there have been some accidents at its mines in recent years, the company reduced the number of lost time injuries at KPC and Arutmin in 2019 from the previous year.

Finally, in terms of governance risks, Moody's has considered Bumi's complex organizational structure and history of debt restructuring. That said, 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's 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.

Nevertheless, the outlook could revert to stable if Bumi materially increases its pace of debt reduction over the next 12 months, while maintaining prudent financial policies and having a clear refinancing plan to address the remainder of its debt maturities due in December 2022.

On the other hand, Moody's could downgrade the ratings if: (1) Bumi's 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; (2) Bumi fails to extend its mining licenses at KPC and Arutmin on substantially similar terms; or (3) Bumi does not adhere to the terms of its cash account management agreement.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Bumi Resources Tbk (P.T.), through its majority-owned subsidiaries, is Indonesia's largest thermal coal producer. The company produced around 86 million tons of coal in 2019. Its principal assets include a 51% stake in Kaltim Prima Coal (P.T.) and a 90% stake in Arutmin Indonesia (P.T.). (ends)