May 4, 2012

S&P revises Bumi outlook to negative

Standard & Poor's Ratings Services (S&P) said today that it had revised its outlook on Indonesia-based thermal coal producer PT Bumi Resources Tbk (BUMI) to negative from stable. 
At the same time, S&P affirmed BB corporate credit rating on BUMI and BB rating on the company's senior secured notes.
S&P also lowered our ASEAN scale rating on Bumi to axBB+ from axBBB- following the revision on the outlook.
"The negative outlook reflects our view that Bumi's debt has remained higher than we had earlier anticipated," said Standard & Poor's credit analyst Vishal Kulkarni. 
"The negative outlook also reflects our expectation that Bumi's operating performance will be weaker in 2012 than in 2011, and that the company's cash flow growth will moderate. Both these factors will likely further limit Bumi's ability to deleverage over the next 12 months."
S&P assessed Bumi's financial risk profile as "aggressive"."We expect the company's financial metrics to likely breach our downgrade triggers over the next 12 months and remain stretched for the rating. We expect the company's ratio of funds from operations (FFO) to total debt at about 10% over the next 12-18 months, barring any debt repayment or refinancing." 
S&P believed the company's plan to prepay its high-cost debt with cash receivables from related parties and asset monetization could be delayed.
S&P assessed Bumi's liquidity as "adequate", as defined in our criteria.  "We expect the company's sources of funds to exceed its uses of funds by 1.7x over the next 12 months. Yet, we view Bumi's scheduled debt maturities of US$480 million in 2013 as sizable and we could review our assessment of the company's liquidity if it fails to arrange the funds for these maturities in the next 12 months. Currently, we do not expect Bumi's free operating cash flows to cover these maturities."
In our base-case scenario for Bumi, S&P has not considered any debt prepayments or resulting interest cost savings. S&P also has not considered payments of receivables from related parties. Nevertheless, S&P's negative outlook acknowledges potential financial upside from reduced interest expense if Bumi prepays some of its high-cost debt. 
"We also note that the company could potentially use these payments to partially repay its own debt, assuming that related parties repay this year. We could lower the rating on Bumi if the company's ratio of FFO to total debt remains below 12% over the next 12 months," said Mr. Kulkarni. 
S&P believed this could happen if production growth is slower or gross profit per ton of coal sold is lower than the rating agency currently expect. 
"We could also lower the rating if Bumi's business or financial risk profiles weaken due to: (1) negative implications of Bumi PLC's operational or financial policies for Bumi; or (2) adverse regulatory changes. These factors could constrain Bumi's ability to reduce debt."
S&P could revise the outlook to stable if Bumi's FFO-to-debt ratio is above 15% and the total-debt-to-EBITDA ratio stabilizes below 3.5x. 
"We believe this could materialize if Bumi's coal production and its gross profit per ton of coal sold significantly exceed our base-case expectations for a sustainable period. We could also revise the outlook to stable if Bumi repays some of its higher-cost debt. The outlook revision assumes that Bumi's operations and cash flow are not negatively affected by developments at Bumi PLC or Bakrie & Bro., and adverse new regulation."

Disclosure: No position at the stock mentioned above.

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