Apr 15, 2011

S&P lowers ENRG rating to CCC+

Standard & Poor's Ratings Services today lowered its long-term corporate credit rating on PT Energi Mega Persada Tbk (ENRG) to CCC+ from B-. The outlook is developing.
At the same time, Standard & Poor's lowered the issue rating on the proposed senior secured notes issued by EMP International Holdings Pte Ltd to CCC+ from B-. ENRG and some of its operating subsidiaries guarantee the notes.
"We lowered the rating on ENRG because of the increased pressure on the company's liquidity from persisting covenant breaches on its existing bank loans," said Standard & Poor's credit analyst Andrew Wong. "We expect the company to have adequate cash to sustain operations."
Energi Mega aims to refinance its existing bank loans to resolve the outstanding covenant compliance issues. Standard & Poor's understands refinance negotiations are continuing.
"We believe the company's financial risk profile will remain highly leveraged in the next 1 to 2 years, even though we expect coverage ratios to further improve in fiscal 2011 after the start of gas production from the Bentu block.
The rating on ENRG reflects the company's highly leveraged financial risk profile; its exposure to hydrocarbon price movements, resulting from the cyclical nature of the industry; limited integration; large investment requirements; and execution risk from major projects. The good growth potential of the company's development blocks and the favorable outlook for energy demand in Indonesia, particularly for gas, somewhat offset those weaknesses.
The rating outlook is developing; the rating hinges on the resolution of existing covenant breaches. We may raise the rating if ENRG refinances existing bank loans, adheres to its operating budgets and capital expenditures, and improves its financial performance in line with our expectations.
"Conversely, we may lower the rating if the company cannot conclude the refinancing and covenant breaches persist. We may also consider a downgrade under the following scenarios.
Due to operational problems or a decline in oil prices, the company has insufficient liquidity to meet ongoing commitments, including interest and capital expenditures.
The company alters or restructures any debt instruments, which is tantamount to a default, based on our criteria.
Disclosure: No position at the stock mentioned above. 

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