Sep 20, 2010

Moody's confirms BUMI rating at Ba3

Moody's Investors Service has today confirmed its Ba3 corporate family rating on PT Bumi Resources Tbk (Bumi) and on the senior secured bond issued by Bumi Capital Pte Ltd, which is wholly owned and guaranteed by Bumi. The outlook on the ratings is negative.
This action closes the review for possible downgrade which was initiated on 14th May 2010.
"The confirmation reflects Moody's expectation that Bumi will arrange sufficient funding to address its very near term refinancing requirements and that its underlying performance will show gradual improvement," says Laura Acres, a Moody's Vice President and Senior Credit Officer, in a press statement today.
The Ba3 rating also reflects Bumi's majority ownership in two of Indonesia's largest thermal coal mines, PT Kaltim Prima Coal and PT Arutmin Indonesia.
Both mines have long reserve lives and well established operations with a track record of consistent production growth.
While the holdco debt burden is high, the position is partially ameliorated by the low leverage at the coal mines and the cash flows they generate.
These cash flows are caught under Bumi's cash distribution agreements and as such provide some protections to creditors as regards debt service, however, final repayment risk continues to lie with the holdco.
"The negative outlook reflects ongoing refinancing risk at the holdco level over the next 12 months [assuming all puts are exercised], although Moody's notes the committed facilities in place to cover near term maturities, specifically those in Q4 2010," said Acres.
The negative outlook also reflects the extent to which Bumi's performance, despite improvement, is below its projections, particularly in terms of normalized, consolidated adjusted debt/EBITDA which stood at 3.9x on an LTM basis and was above the downward trigger of 3.0x.
"Given underlying improved performance at the coal companies in 1H 2010, together with plans to raise US$350-US$400 million through the pre-emptive rights issue, the proceeds of which will be deployed towards debt repayment.
It is Moody's expectation that debt/EBITDA could fall to 3.0x-3.3x for FY 2010, which is still considered high for Ba3 rating," said Acres, also Moody's Lead Analyst for Bumi.
Upward rating pressure is unlikely given the negative outlook.
The outlook could revert to stable should Bumi deliver on its financial projections and offer a clear plan to reduce the debt burden such that adjusted, consolidated, debt/EBITDA falls below 3.0x on a consistent basis.
Further downward pressure could emerge on the rating should Bumi fail to deal convincingly with its debt maturity profile over the next 12 months such that it refinances facilities with other short-term lines.
Moody's would also be concerned if production at the coal companies faltered such that Bumi was unable to deliver on its projections and specifically its deleveraging plans or if it deviates from the business plan and strategy currently contemplated as part of the rating.
Moody's would also look for holdco leverage to decrease and failure to do so would put downward pressure on the rating.
The last rating action was taken on 14th May 2010 when Bumi's ratings were placed under review for possible downgrade following worse than expected financial performance and eroding headroom under covenants. 

Disclosure: No position at the stock mentioned above.

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