Jan 17 -
-- Bumi's operating cash flows will likely be weaker than we anticipated in 2013 due to low coal prices, high production costs, interest, and tax outgoings.
-- We therefore do not expect any meaningful reduction in debt for the Indonesia-based thermal coal producer.
-- We are lowering our long-term corporate credit rating on Bumi to 'B' from 'B+' and our issue rating on its guaranteed senior secured notes to 'B' from 'B+'. We are also lowering our long-term ASEAN regional scale rating on the company to 'axB+' from 'axBB-'.
-- We are keeping all the ratings on CreditWatch with negative implications due to refinancing risk in 2013.
On Jan. 17, 2013, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Indonesia-based thermal coal producer PT Bumi Resources Tbk. (Bumi) to 'B' from 'B+'. At the same time, we lowered the rating on the company's guaranteed senior secured notes to 'B' from 'B+'. We also lowered our long-term ASEAN regional scale rating on Bumi to 'axB+' from 'axBB-'. The ratings remain on CreditWatch, where they were placed with negative implications on Sept. 26, 2012.
We downgraded Bumi because we expect the company's cash flow to be weaker in 2013 than we had anticipated. We expect Bumi's ratio of funds from operations (FFO) to debt to be below 5% over the next 12 months. We have revised our assessment of the company's financial risk profile to "highly leveraged" from "aggressive."
We lowered our forecast of Bumi's gross profit per ton of coal sold (excluding depreciation) to US$20-US$23 from US$28-US$32. We expect coal prices to remain subdued and the company to sell a higher volume of low-quality coal. This will more than offset a likely improvement in Bumi's cash costs from its expected lower stripping ratios (the ratio of soil removed to obtain a ton of mineral). In our base case for 2013, we expect gross coal production at Bumi's coal companies at 80 million ton, Bumi's EBITDA at US$700 million-US$800 million, its debt at above US$4.5 billion, and its cash interest costs at about US$450 million.
Bumi's high interest and tax outgoings are likely to continue to erode its debt-servicing cushion. We anticipate that the company's FFO to interest coverage will average 1x-1.5x over the next two to three quarters. Nevertheless, we believe Bumi's inventory at the end of 2012 provides some liquidity buffer if production growth trails our expectation.
We do not expect Bumi to meaningfully reduce debt in 2013 because the company's ability and willingness to sell assets to repay debt is untested. We anticipate that Bumi's debt-to-EBITDA ratio will exceed 6x and its debt to capital (debt plus equity) will stay above 90% in 2013.
We assess Bumi's management and governance as "weak," as defined in our criteria. We believe the company's financial management is very aggressive, reflected in its appetite to maintain high leverage. This weakness overshadows the satisfactory underlying operational and financial management at the coal companies, reflected in their track record of modest production growth and sustained cash flow generation.
We expect Bumi to refinance about US$570 million debt in 2013, including about US$330 million at Bumi's subsidiary PT Bumi Resources Minerals Tbk. (BRM). Of the maturing debt, US$485 million is with a single bank with which Bumi has a long-term relationship. We believe this link will help Bumi focus its refinancing negotiations and reduce the risk of refinancing delays. BRM has a stake in Indonesia-based producing gold and copper mine PT Newmont Nusa Tengara (not rated). The asset is the collateral for the maturing debt at BRM and could be adequate for refinancing. Still, we believe that Bumi could secure refinancing only shortly before debt is due.
We kept the ratings on CreditWatch because Bumi could face difficulty in refinancing debt maturing in 2013. This is because of an ongoing investigation by Bumi's 29.5% shareholder Bumi PLC (not rated) into potential financial irregularities at Bumi and continued shareholder disagreements have weakened Bumi's access to capital.
Bumi's operating performance in the nine months ended Sept. 30, 2012, was in line with our expectation. Its coal companies produced about 51 million tons (gross) and had a gross profit per ton was about US$27. High interest and tax led to negligible FFO generation. Bumi wrote-off US$422 million in derivative assets following a revaluation of a debt pre-payment option. The write-off weakened Bumi's capital structure and did not affect its cash flows.
We expect Bumi's liquidity to be "less than adequate," as defined in our criteria. We expect the company's ratio of sources of funds to uses to be less than 1.0x in 2013. Our liquidity analysis is based on the following factors and assumptions:
-- The company's sources of funds include unrestricted cash balance of US$57 million and restricted cash of US$103 million as of Sept. 30, 2012. Sources also include FFO of US$50 million-US$100 million in 2013.
-- Key uses of funds include debt repayment of US$570 million in 2013. Uses also include capital expenditure of US$150 million in 2013.
We note that Bumi's financial covenants restrict its ability to borrow additional debt, except to repay existing debt.
We aim to resolve the CreditWatch when Bumi refinances its debt maturities that are due in the third quarter of 2013.
We could lower the rating if Bumi does not complete its refinancing by May 2013.
Related Criteria And Research
-- How We Use Management And Governance Credit Factors, Nov. 13, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
PT Bumi Resources Tbk.
Corporate Credit Rating B/Watch Neg/-- B+/Watch Neg/--
ASEAN Regional Scale Rating axB+/Watch Neg/-- axBB-/Watch Neg/--
Bumi Capital Pte. Ltd.
Senior Secured B/Watch Neg B+/Watch Neg
Bumi Investment Pte. Ltd.
Senior Secured B/Watch Neg B+/Watch Neg