Moody's affirms Indika's Ba3 ratings and assigns Ba3 to proposed US dollar notes; outlook remains negative

(Singapore, October 12, 2020) -- Moody's Investors Service has affirmed the Ba3 corporate family rating (CFR) of Indika Energy Tbk (P.T.), and the Ba3 ratings on the $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.

At the same time, Moody's has assigned a first-time Ba3 rating to the backed senior secured notes to be issued by Indika Energy Capital IV Pte. Ltd. The proceeds from the notes will be primarily used to refinance existing debt. The notes are unconditionally and irrevocably guaranteed by Indika and will rank pari passu with Indika's outstanding US dollar notes.

The outlook remains negative.

"The affirmation of Indika's Ba3 ratings reflect its diversified operations, long operating track record, solid liquidity, and continued adherence to prudent financial policies -- as shown by its planned US dollar notes issuance to proactively refinance its debt maturities ahead of schedule," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"The negative outlook continues to reflect our expectation that its credit metrics will remain weak over the next 12 months amid a challenging operating environment, including low thermal coal prices," adds Hasnain, also Moody's Lead Analyst for Indika.

RATINGS RATIONALE

Moody's expects proceeds from Indika's proposed US dollar notes issuance, which form part of its $650 million debt raising plans announced in September, will be used primarily to refinance the majority of its US dollar notes coming due in 2022-23. Part of the proceeds will also be used to invest in non-coal related businesses.

Upon completion of its planned refinancing, which Moody's views as credit positive, Indika will not have any material debt maturities until 2024. As a result, Indika's strong liquidity and minimal near-term refinancing risk afford it time to improve its weak credit metrics amid challenging business conditions, including low thermal coal prices.

Based on its medium-term price assumptions for Newcastle thermal coal of $65 per ton, Moody's estimates Indika's adjusted leverage -- as measured by adjusted debt/EBITDA - will remain elevated at around 4.3x as of 31 December 2021, up from 3.5x in December 2019 and slightly above the downgrade trigger of 4.0x.

However, in light of slowing economic growth, the downside risk to Indika's credit metrics worsening beyond Moody's current expectations is elevated, particularly if coal prices remain low for a prolonged period.

In order to support earnings, Indika has taken steps to reduce operating cash costs at its 91%-owned coal mining subsidiary, Kideco Jaya Agung (P.T.) to $32.3 per ton in 1H 2020 from $35.6 per ton in 1H 2019. Indika's contract mining subsidiary PT Petrosea Tbk and engineering subsidiary PT Tripatra Multi Energi, are also seeking new contracts to boost their contract order books which have been declining in recent years, although near-term contract wins could be challenging given the weak macroeconomic environment.

Moody's expects Indika will maintain its good liquidity, as its large consolidated cash balance and projected operating cash flows will be sufficient to meet its cash needs over the next 12-18 months. Moody's also expects Indika's planned investments, as part of its strategy to diversify earnings away from thermal coal, will not materially weaken its liquidity.

Moody's also expects Indika to obtain additional covenant relaxations or waivers on its two bank loan facilities. In June, Indika obtained temporary covenant relaxations on these facilities, which allowed for its leverage ratio to be calculated as net debt/EBITDA not exceeding 3.75x until December 2020 on one loan and until March 2021 on the other. Absent a material near-term earnings improvement, a covenant breach would likely occur once the covenant ratio reverts to the original gross debt/EBITDA calculation beyond December 2020 and March 2021, respectively.

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

First, Indika faces elevated environmental risks associated with the coal mining industry, including carbon transition risk as countries seek to reduce their reliance on coal power. However, this risk is somewhat mitigated by (1) Indika's geographically diversified customer base, which includes state-owned utilities across Asia, a region with growing energy demand and where thermal coal is still a relatively low-cost source of energy, and (2) its good coal quality, with low ash and sulfur content.

Second, Indika is also exposed to social risks associated with the coal mining industry, including health and safety, and responsible production. To address these risks, Indika has initiated sustainability initiatives under its health, safety and environment programs, and carries out corporate social responsibility activities via the Indika Foundation.

Third, with respect to governance, Indika's ownership is concentrated in its major shareholders, who own around 68% of the company. However, this risk is mitigated by Indika's listed status and long track record of maintaining prudent financial policies.

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

An upgrade of Indika's ratings is unlikely over the next 12-18 months, given the negative outlook.

The outlook could return to stable if Indika improves its credit metrics on a sustained basis, and maintains sufficient liquidity to cover its cash needs over the next 12-18 months.

Specific indicators that Moody's would consider for a change in outlook to stable include adjusted debt/EBITDA below 4.0x and adjusted EBIT/interest above 2.0x, both for an extended period.

Moody's could downgrade the ratings if (1) Indika's credit metrics weaken due to a sustained decline in coal prices or reduced production volumes; (2) Kideco fails to extend its Coal Contract of Work (CCoW) mining license on substantially similar terms; (3) Indika's liquidity weakens or it is unable to cure a covenant breach; or (4) Indika engages in aggressive shareholder distributions or investments, demonstrating a departure from its track record of preserving liquidity.

Specific indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 4.0x or adjusted EBIT/interest below 2.0x, both for an extended period.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Indika Energy Tbk (P.T.) is an Indonesian integrated energy group listed on Indonesia's Stock Exchange, with a market capitalization of around IDR4.8 trillion ($330 million) as of 9 October 2020. Its principal investment is a 91% stake in Kideco Jaya Agung (P.T.), one of Indonesia's largest domestic coal producers.