Moody's affirms Indika's Ba3 ratings; outlook stable

(Singapore, February 04, 2020) -- Moody's Investors Service has affirmed the Ba3 corporate family rating (CFR) of Indika Energy Tbk (P.T.) (Indika).

At the same time, Moody's has also affirmed 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. All notes are unconditionally and irrevocably guaranteed by Indika and rank pari passu.

The outlook is stable.

RATINGS RATIONALE

"The rating affirmation reflects our expectation that, despite weakness in its credit metrics, Indika's credit profile will be supported by its stable operations, strong liquidity and adherence to prudent financial policies," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

Indika's commitment to maintaining a strong balance sheet provides cushion against its weakening credit metrics, the result in turn primarily of declining coal prices. The company had a large cash balance of around $611 million as of 30 September 2019, with no material near-term debt maturities until 2022.

Nevertheless, declining coal prices over the last 12 months have weakened Indika's credit metrics, and have lowered earnings at its 91% owned mining subsidiary, Kideco Jaya Agung (P.T.).

Kideco's reported EBITDA for the nine months ended September 2019 declined to $188 million from $430 million for the nine months in the preceding year. As a result, Indika's adjusted leverage -- as measured by adjusted debt/EBITDA -- increased to 3.5x as of September 2019 from 2.4x in 2018.

Based on Moody's medium-term price assumptions for Newcastle thermal coal of around $75 per ton, Moody's estimates Indika's adjusted leverage will rise further to around 3.8x over the next 12-18 months. However, a prolonged decline in coal prices will further weaken Indika's leverage, thus eroding the limited headroom under its Ba3 rating.

The Ba3 CFR reflects Moody's expectation that Kideco's coal contract of work (CCoW) mining license, which expires in March 2023, 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.

"Indika's Ba3 CFR also takes into account its commitment to conservative financial policies which balances its risk profile during periods of volatility in thermal coal prices. Accordingly, we expect Indika to maintain a prudent approach to any new investments, particularly as it seeks to reduce its earnings exposure to thermal coal in the coming years," adds Hasnain, also Moody's Lead Analyst for Indika.

Indika has sufficient liquidity to meet its cash needs for the next 12-18 months, and Moody's expects Indika to continue to proactively refinance its debt maturities well ahead of its large $1.1 billion debt maturity wall between 2022 and 2024.

While Indika is likely to not meet a financial maintenance covenant on its bank loans in 2020, Moody's expects the company will address this risk by either obtaining waivers or renegotiating its covenants. Indika's holding company cash balance of $348 million is also considerably larger than the $201 million outstanding balance on these bank loans as of 30 September 2019.

The rating also considers 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 initiates 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 somewhat mitigated by Indika's listed status and long track record of maintaining prudent financial policies.

The stable rating outlook reflects Moody's expectation that Indika will (1) maintain its credit profile and retain a conservative approach to investments and shareholder returns; and (2) sustain strong liquidity and proactively refinance debt maturities.

A near-term upgrade of the ratings is unlikely. Nevertheless, the ratings could be upgraded in the longer term if Indika improves its credit metrics on a sustained basis, and is successful in extending the Kideco CCoW beyond its 2024 bond maturity, with no material changes to the existing terms.

Specific indicators Moody's would consider for an upgrade include adjusted debt/EBITDA below 2.5x and adjusted EBIT/interest above 3.0x, 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; (2) Kideco fails to extend its CCoW on substantially similar terms; or (3) Indika engages in aggressive shareholder distributions or investments, demonstrating a departure from its track record of liquidity preservation.

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. 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 IDR4.9 trillion ($360 million) as of 03 February 2020. Its principal investment is a 91% stake in Kideco Jaya Agung (P.T.), one of Indonesia's largest domestic coal producers. (ends)