Feb 27 -
-- We expect the operating performance and cash flow stability at Indonesia-based coal miner PT Berau Coal Energy to continue to improve over the next two years.
-- We are revising our rating outlook on Berau Energy to positive from stable and affirming our 'BB-' corporate credit rating and issue rating on the senior secured notes guaranteed by Berau Energy.
-- We are assigning our 'BB-' rating on Berau Energy's proposed US$500 million senior secured notes.
-- The positive outlook reflects our view that the company's cash flow and debt ratios will continue to improve over the next two years because of higher production and stable pricing prospects for thermal coal.
Standard & Poor's Ratings Services revised its outlook on Indonesia-based thermal coal miner PT Berau Coal Energy (Berau Energy) to positive from stable. At the same time, we affirmed the 'BB-' corporate credit rating on Berau Energy and the 'BB-' issue rating on the senior secured notes guaranteed by Berau Energy.
Standard & Poor's also assigned its 'BB-' issue rating to a proposed issue of US$500 million senior secured notes by Berau Energy. The proposed notes will mature in 2017.
The positive outlook reflects our view that Berau Energy's financial risk profile will continue to improve over the next two years. We expect production growth and steady thermal coal prices to result in stronger cash flows and improving leverage over the period.
Under our base-case scenario, we project Berau Energy's ratio of total debt to EBITDA to improve gradually to about 1.8x in 2013, from about 2.2x in 2012. We also expect the company's ratio of total debt to total debt plus equity to decline to about 56% in 2013, from about 61% in 2012. These projections assume (1) coal sales of 22 million tons in 2012 and 27 million tons in 2013; (2) gross profit per ton in the US$22-US$25 range over 2012-2013; and (3) capital expenditures of US$360 million in 2012 and US$330 million in 2013 to increase production. In our opinion, Berau Energy's growing production and higher EBITDA should lower the sensitivity of its financial performance to slower production growth or weaker gross profit per ton. Berau Energy's gross profit per ton was about US$35 for the nine months ended Sept. 30, 2011.
In our view, higher production levels and steady coal prices should also offset a US$160 million increase in Berau Energy's absolute debt levels if the company's proposed US$500 million bond issue proceeds. Berau Energy's coal sales increased to 18.6 million tons for the 11 months ended Nov. 30, 2011, from 15.7 million over the same period in 2010. The company's EBITDA grew to US$532 million for the period, from US$336 million for the fiscal year ended Dec. 31, 2010.
The rating on Berau Energy is a combination of what we consider as the company's current and expected "weak" business risk profile and "significant" financial risk profile, as defined in our criteria. The rating reflects the Indonesian coal producer's mineral, customer and single-mine concentration risks, regulatory uncertainty, and its aggressive capital structure. Berau Energy's good record of production growth, improving cash flows, and low, albeit increasing, cost production profile partially offset these weaknesses.
The issue rating on the proposed US$500 million notes reflects the 'BB-' long-term corporate credit rating on Berau Energy. The rating on the proposed notes is subject to our review of the final issuance documentation, and confirmation of the amount and terms of the notes. The notes are secured by first-priority liens on the company's debt and interest reserve accounts and the capital stocks of the subsidiary guarantors, including PT Berau Coal. Berau Energy expects to use the proceeds from the proposed notes to repay US$340 million of its senior secured credit facility and the remaining US$160 million for general corporate purposes and capital expenditures.
Berau Energy's main operating subsidiary, PT Berau Coal, unconditionally guarantees the proposed notes. The notes will rank pari passu with the US$450 million notes, issued by Berau Capital Resources Pte. Ltd. in 2010 and also unconditionally guaranteed by Berau Energy. The cash and accounts management agreement dated July 20, 2010, governs the bank accounts of Berau Energy and its operating subsidiary PT Berau Coal, and will remain in place following the issue of the proposed notes. The agreement acts a cash waterfall that allocates proceeds from coal sales to different reserve accounts, including tax reserve, operating expense, operating reserve, debt service, and distribution accounts.
In our view, Berau Energy's liquidity is "adequate," as defined in our criteria. The company's liquidity is sensitive to thermal coal prices and production volumes. Nevertheless, we believe the company can fund its short-term debt repayment and capital spending with its internal cash flows, cash balance, and the proceeds from the proposed notes.
We expect Berau Energy's liquidity sources to exceed its liquidity needs by about 1.2x or more over the next 12 months. We also anticipate that the company's liquidity sources will exceed its needs even if EBITDA declines by 20%.
Our liquidity assessment incorporates the following factors and assumptions:
-- Liquidity sources over the next 12 months include our expectation of funds from operations of about US$180 million. The company had about US$462.7 million of cash and cash equivalents as of Sept. 30, 2011. This cash balance includes funds that can only be employed for the payment of taxes, debt, and interest (the precise numbers are not publicly available). We also factor into Berau Energy's liquidity sources the expected proceeds from its US$500 million notes. Finally, Berau Energy's access to capital markets is adequate, in our view.
-- Liquidity needs over the next 12 months include our expectation of capital spending of about US$360 million. They also include Berau Energy's prepayment of US$340 million of its senior secured credit facility in the event that its proposed US$500 million bond proceeds, US$13.1 million of accrued interest, and tax payables of US$197 million. We also have factored in US$50 million in dividend distributions.
Upon repayment of its senior secured credit facility, the company will not face further minimum maintenance financial covenants.