Apr 11, 2011

Berau Energy ratings raised to BB-

Standard & Poor's Ratings Services (S&P) said today that it had raised its long-term corporate credit rating on Indonesia-based coal mining company PT Berau Coal Energy (Berau Energy) to BB- from B+. The outlook is stable. "We also raised our issue rating on the senior secured notes issued by Berau Capital Resources Pte Ltd, a wholly owned subsidiary of Berau Energy, to BB- from B+," said S&P in a press statement obtained by Bisnis today.
At the same time, S&P also removed all the ratings from CreditWatch, where they were placed with positive implications on Nov. 23, 2010. "We raised the ratings on Berau Energy because the company's financial risk profile has improved." The improvement follows Vallar PLC's purchase of PT Bukit Mutiara's 75% stake in Berau Energy. As a part of the transaction, Vallar paid Berau Energy's parent Bukit Mutiara about US$739 million. Bukit Mutiara has used the cash to repay the majority of its debt. 
"In our assessment of Berau Energy, we consolidated the debt [about US$800 million] at the parent. Therefore, we consider Berau Energy's leverage to have improved substantially because of the significant reduction in debt at Bukit Mutiara," said Standard & Poor's credit analyst Suzanne Smith.
S&P believes the new ownership is neutral for Berau Energy, at least in the next 12 to 18 months, due to the absence of liabilities at Vallar and no negative effect on Berau Energy's notes due to the change of control.
"The ownership could be positive for Berau Energy over the next 2 to 3 years because the company could benefit from being a part of a larger mining group."
The ratings on Berau Energy reflect the company's exposure to coal price volatility, Indonesia's evolving regulatory framework, and the company's currently small reserves and mineral concentration risk. These weaknesses are tempered by Berau Energy's low cost profile, consistent production growth, and established relationships with its clients. 
"We expect the company to maintain its ratios of debt to EBITDA at about 2x and funds from operations (FFO) to debt at about 20%."
Berau Energy's liquidity is adequate. As at Dec. 31, 2010, the company had unrestricted cash and equivalents of US$390 million and additional restricted cash of US$156 million. 
It could use the restricted cash to service its debt. It generated FFO of US$150 million in the fiscal year ended Dec. 31, 2010.
"We expect Berau Energy's FFO to be about US$175 million in fiscal 2011. In addition, we anticipate the company's annual capital expenditure at about US$130 million for the next 2 to 3 years. Its FFO and cash at hand should be sufficient to meet debt maturities of about US$60 million and its capital expenditure. We expect Berau Energy to maintain a comfortable debt service coverage ratio of about 3.0x." 
The stable outlook reflects our expectation that Berau Energy's cash flows will improve due to an increase in production, the company's ability to maintain margins, and the favorable demand for thermal coal.
The rating agency could lower the rating if Berau Energy's liquidity and financial risk profile weaken beyond our expectation due to aggressive growth aspirations, a sharp increase in the company's cash cost of production or softer coal prices weaken cash flows, such that the company's debt-to-EBITDA ratio is above 3.5x on a sustainable basis; or financial policies at Vallar cause material negative changes in Berau Energy's capital structure.
While the likelihood of another upgrade is minimal, S&P could raise the rating if Berau Energy's competitive position improves significantly. 
This could happen if the company's proven reserves increase substantially, along with an improvement in its cost profile, production, and sales.

Disclosure: No position at the stock mentioned above.
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