(The following statement was released by the rating agency)
Sept 25 – Fitch Ratings has affirmed coal producer PT Adaro Indonesia’s (Adaro) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BB+’. The Outlook is Stable. Fitch has also affirmed Adaro’s USD800m senior unsecured notes due in 2019, guaranteed by its 100% parent, PT Adaro Energy Tbk (Adaro Energy), at ‘BB+’.
The ratings of Adaro are based on the consolidated credit profile of Adaro Energy, given their strong linkages. Adaro’s operating and financial policies are tightly controlled by the parent and its shareholders. It is the primary source of cash generation for Adaro Energy, accounting for over 80% of the latter’s consolidated EBITDA. Adaro also raises debt on behalf of its parent – which is guaranteed by Adaro Energy – for the latter’s investments in coal resources and supporting logistics operations.
The affirmation reflects Fitch’s expectation that Adaro Energy would maintain a financial profile appropriate for its rating in the medium term, despite weakened coal prices. While there is a risk Adaro’s leverage increasing beyond Fitch’s negative guidance over the next two years due to weak coal prices, the agency does not expect this to be sustained for an extend period of time.
Coal spot prices have been declining so far in 2012 and the Indonesian coal reference price, Harga Batubara Acuan, was over 25% lower in August 2012 than the average in 2011. However, Adaro Energy’s ASP in 2012 is likely to remain broadly unchanged in relation to 2011 (USD 73/mt) as about 65% of its production is priced on an annual basis. Fitch, however, expects Adaro Energy’s ASP to be lower in 2013 (around low- to mid-USD60/mt), as the company contracts for delivery output in 2013, also reflecting Fitch’s view of a slow coal price recovery over the next 12 to 18 months. Despite this, Adaro Energy’s low cash costs (USD46.3/mt in H112, inclusive of royalty payments) and lower capex post 2012 should allow the company to remain free cash flow positive and aid deleveraging. At end-June 2012, Adaro Energy’s funds from operations (FFO)-adjusted gross leverage was 3.0x and FFO interest coverage 6.8x (2.7x and 6.4x for Adaro)
The ratings reflect Adaro’s position as one of the world’s lowest-cost producers of thermal coal, strong and profitable production growth, established relationships with creditworthy customers, solid liquidity and adequate through-the-cycle credit metrics of both Adaro Energy and Adaro.
The ratings also reflect Adaro’s reliance on a single mining concession and evolving mining regulations in Indonesia. Despite Adaro Energy’s diversification of its resource base, these assets are unlikely to materially contribute to production in the short- to medium-term, especially as the company is likely to delay certain development expenditure until a recovery of the coal industry is underway.
Adaro Energy’s liquidity is supported by cash reserves of USD574m, undrawn committed credit facilities of USD435m as at end-H112 and expected free cash flow generation of over USD200m from 2013 onwards. Adaro has demonstrated strong access to both banks and capital markets.
What could trigger a rating action?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-A successful increase in production from its current operations and newly acquired greenfield assets and significantly increasing scale and diversification in terms of production sites while maintaining funds from operations (FFO) gross leverage below 2.0x
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Adaro Energy’s FFO gross leverage being sustained above 2.75x or FFO interest coverage falling below 5x for two consecutive years
-A material deviation from its policy of maintaining strong liquidity
-Adverse regulatory developments significantly impairing Adaro Energy’s financial profile
-Any further substantial investments that weaken Adaro’s financial or operating risk profile
-A sustained material weakening of coal prices