Nov 19, 2010

Moody's: No impact on Bumi rating

Moody's Investors Service notes the series of transactions announced by the recently formed Vallar Plc, a UK-listed mining investment vehicle, with respect to its investment in the Indonesian coal mining sector, and sees no immediate impact on the B2/Stable rating of PT Berau Coal and the Ba3/Negative rating of PT Bumi Resources Tbk.
These transactions include the sale to Vallar Plc by PT Bakrie and Brothers (unrated) of a 25% holding in Bumi Resources and the sale by Recapital Advisors (Recapital) of a 75% holding in PT Berau Coal Energy (BCE), the immediate parent of Berau Coal.
On completion of the transactions, expected in Q2 2011, Recapital will hold 25% and Bakrie 43% of Vallar Plc.
Vallar Plc will eventually be renamed Bumi Plc. The consideration involves the issue of new Vallar shares and additionally, in respect of BCE, a cash consideration of US$739 million.
The cash has now been received by Recapital for its BCE shares and the economic rights given to Vallar, although the shares will remain in the name of Bukit Mutiara until April 2011, when the change of ownership will be registered.
Under the terms of the US$450 million notes issued by Berau Capital Resources Pte. Ltd, a change of control event will occur once Vallar Plc owns the BCE shares.
The issuer would then need to make a tender offer for the bonds, within 30 days, at a price of 101% of face value.
The early repayment would also trigger a cross-default in a US$400 million credit facility. However, on its own, the loan will require only the consent of lenders if the obligor changes.
The bonds are currently trading at a premium to the price that would be offered under the change of control clause.
Moody's is unaware of any alternative liquidity facility that could support the repayment of all the bonds and the loan were an event of default called by creditors.
However, the likelihood of such an event is remote in the near term and Moody's expects the change of control tender, and the process of obtaining consents from lenders, to be carefully managed between now and the completion of the deal in April.
The cost burden in terms of fees and purchases of tendered bonds is likely to be manageable and Moody's understands that it is not BCE's intention to cancel any bonds so acquired.
At September 30, 2010, BCE reported cash and short-term investments of approximately US$482 million, including US$156 million in restricted cash holdings.
Moody's notes that the broad wording of the change of control language in Bumi Resources's bond documents seems to preclude a change of control event from arising on this occasion, as Bakrie Group affiliates will retain control of Bumi Resources by way of their interest in Vallar.
Moody's therefore expects no impact on Bumi Resources arising from these transactions. The minimal downside risk of a large event of default at BCE is mitigated by some positive developments.
In particular, the cash now received by Recapital has been applied to pay down its own indebtedness, which is held by its subsidiary Bukit Mutiara, the immediate vehicle holding its BCE shares.
This debt represents the recently refinanced vendor notes (some US$500 million) owed to the last owners of BCE, as well as an outstanding US$150 million owed to Bumi Resources.
Moody's will continue to monitor developments at BCE and also consider the credit standing of Vallar Plc as the new holding company for BCE.
As at September 30, 2010, Vallar Plc held some US$1 billion in cash and no debt on its balance sheet.
Some US$740 million of the liquid funds have since been disbursed as the cash element of the BCE acquisition.
Recapital's debt has been a factor weighing on Berau's rating, given that any default by Bukit Mutiara would cross-default into BCE.
Meanwhile, Berau Coal's operating performance is currently meeting expectations.
Given the performance of BCE and the removal of the debt overhang at Recapital, Moody's may consider a positive rating action, subject to the removal of the residual threats arising from both the bond's change of control clause and from facility lenders denying consent to the change of obligor.

Disclosure: No position at the stock mentioned above.

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