RPT-Fitch Affirms Indika at 'B +'; Change Outlook Being Negative

Tue Jul 22, 2014 4:32am EDT

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July 22 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has revised the Outlook Indika Energy Tbk (Indika) from stable to negative. At the same time, rating Long-Term Foreign Currency and Local Currency Issuer Default Rating (IDR) Indika is affirmed at 'B +'. The letters senior unsecured debt as well affirmed at 'B +' with a Recovery Rating at 'RR4'.

Outlook revision reflects the deterioration of coverage due to lack of interest in Indika dynamics of the coal industry today. Affirmations ranking, however, Indika consider adequate liquidity with cash reserves and yet the majority of debt maturing until 2018, and also Fitch's expectation that recovery of coal prices, although marginal, will happen in 12-18 months front. However, rank relatively limited space. Because of variations in the level ownership and operational control of many entities, Fitch focuses on Credit metrics are calculated based on EBITDA of Indika and subsidiaries wholly owned, including dividends from other operational entities (EBITDA parent company).

Factors Fueling Rating

Weak Coverage Rate: Indika flower Coverage - EBITDA ratio of parent Indika interest expense divided by the company and its subsidiaries owned wholly-down to about 2x in 2013 from 3.2x in 2012.'s due because dividends received decreased to almost half, particularly from PT Kideco Jaya Agung (Kideco), coal mines owned by 46% Indika, Indika for USD108juta paying dividends, or nearly 70% of the total cash Indika received in 2013. Fitch believes that the scope of interest of the company parent will weaken in 2014 and 2015 due to the decline in dividends from Kideco based on the realized price of coal in 2013 and to date in 2014.

Dividends from Kideco will drop to USD88juta in 2014 and Fitch expects dividends will again drop below USD50juta in 2015. Besides dividend of Kideco, Fitch expects additional dividend of approximately USD20juta per year of the subsidiary and other affiliated companies with Indika.

With the reduction in dividend income as well as capital expenditure for The new office building and investment in new coal assets, PT Multi Main Tambangjaya, Fitch estimates that the parent company will produce free-cash flow negative in 2014. Subsidiary Indika, company contracts Mining, PT Petrosea Tbk (Petrosea) and barging company MBSS, not Indika in need of financial assistance. However, Fitch expects improvement in interest coverage at the parent company in 2016, which caused improvement in coal prices, although marginal, and the increasing volume of coal produced in Kideco.

Weak Coal prices: Fitch expects Newcastle coal price benchmark (currently around USD70/MT) will increase gradually. this is due to Fitch's view that a sizeable proportion of the coal supplied to sea-borne market is not profitable at current price levels. Fitch also noted that most of the miners have been mining coal selective in the mining area which is more cost effective, which is generally the sacrificing long-term reserves and will not be sustainable. However, price improvement will occur slowly due to market oversupply will remain, especially with the weakening demand from China.

Sufficient Liquidity: Indika bonds that will mature next USD300juta in 2018. Company has cash and cash equivalents of USD300juta (not including cash of subsidiaries that are not wholly owned), which should be able to cover the estimated free cash flow negative at the parent level companies in 2014 and 2015. Indika will also have debt amounting USD500juta which will mature in 2023. USD500juta From this, USD115juta lent on Petrosea, Indika company owned by 70%.

Sensitivity rating:

Negative: future developments that may, individually or collectively, trigger a downgrade include:

- The weakening of the level of liquidity in the holding company level that materially measured by a decrease in the level of cash reserves of the parent company and its subsidiaries became a wholly-owned under USD150juta.

- Failure to improve EBITDA interest coverage at the holding company level be above 1.5 x (forecast basis)

- The price of coal is weaker than expected

Positive: future developments that may individually or collectively trigger a rise in the rankings include:

- Fitch revises outlook Indika will be stable, and also affirmed IDRs at 'B +' if the company increases the interest coverage above 1.5 x and maintain strong liquidity.

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