Fitch Assigns 'B' Ratings to Indonesia's Indika; Outlook Stable

Fitch Ratings has today assigned Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'B' to PT Indika Inti Energi (Indika). The Outlook for the IDRs is Stable. At the same time, the agency has also assigned an expected issue rating of 'B' and an expected recovery rating of 'RR4' to the proposed USD250 million senior secured notes due in 2012 issued by Indo Integrated Energy B.V. and guaranteed by Indika and its 100%-owned subsidiary PT Indika Inti Corpindo. The final ratings are contingent upon receipt of documents conforming to the information already received.

The ratings reflect Indika's status as a holding company that derives a major portion of its cash flow from dividends received from its 46%-owned associate, PT Kideco Jaya Agung (Kideco), rather than from its own operations. Fitch notes that Indika is not the largest shareholder in Kideco, which is the third largest coalmining company in Indonesia, given a majority stake of 49% is owned by South Korea-based Samtan Inc. (Samtan), while the remaining 5% is held by PT Muji Inti Utama (Utama), a company unrelated to both Samtan and Indika. Kideco will not guarantee the proposed notes but Indika's shares in Kideco will be pledged as security to the noteholders. The ratings also reflect Indika's aggressive financial profile, which is characterised by high financial leverage. Even after adjusting EBITDA to include cash dividends from associates, Fitch estimates that Indika's Debt/EBITDA ratio in 2007 will be around 6x.

Fitch expects the dividend flow from Kideco to remain strong, exceeding USD15m per annum even in the stress scenario that there is no growth in the current production volume and the average selling price of coal drops to USD26 per ton from the USD31 per ton achieved in 2006. This is due to Kideco's sound operational capability under a robust Coal Contract of Work (CCOW), competitive coal mining costs, strategy of contracting out its entire production with its well-established customers and conservative financial leverage with small capital expenditure requirements. Also, the agency notes that the shareholder agreement between Samtan, Indika and Utama provides some certainty on cash dividends being up-streamed from Kideco, as it obliges Kideco to pay at least 80% of its net income as dividends.

In addition, despite its minority stake, Indika is able to influence Kideco's key decisions, including capex and financing plans, as the shareholders' agreement requires approval of at least 60% of the shareholders for these decisions (52% prior to the release of an existing pledge of Kideco shares, which is expected to occur upon the completion of the proposed notes issue and the redemption of existing debt). To further reduce the risk of dividend flow curtailment, the covenants of the proposed notes will require Indika to exercise this influence to limit the level of Kideco's external debt.

Indika also derives part of its cash flow from its 100%-owned subsidiary, Tripatra group (Tripatra), which is involved in Engineering, Procurement and Construction (EPC) and Operations and Maintenance (O&M) businesses, specifically in the oil and gas sectors. While Tripatra is a leading player in Indonesia and has had long term relationships with global oil majors, its cash flow tends to be lumpy given the volatility inherent in the businesses. Tripatra's on-going projects of USD300m, together with projects under letter of intent of USD120m, provide earnings visibility until 2008/2009 but prospects beyond that will depend on the continued robustness of the oil and gas sector in Indonesia.

Fitch also notes that while cashflows from Tripatra are available to service Indika's debt, Tripatra will not guarantee the proposed notes, nor will Indika's shares in the Tripatra entities be pledged as security to the noteholders.

Of the USD250m to be raised from the proposed notes, approximately USD60m is allocated to be used for the acquisition of a coal asset in Indonesia, around USD40m for the investment in minority stakes in power plant projects, and USD118m for refinancing existing debt. The remaining USD32m is earmarked for working capital and general corporate purposes. Fitch views that the investment risk arising from the planned debt-funded acquisitions is high, as there is significant uncertainty on the size and quality of future cash flow from these assets. The target for the coalmine acquisition has not been finalised, while the power assets are still in the development/construction stages. However, Fitch acknowledges that a successful implementation of the new investment plans, which are complementary to Indika's existing businesses, could result in greater synergies across the company's major business activities.

The Stable Outlook reflects Fitch's expectation that dividend flows from Kideco will remain steady. A positive rating action may be taken if Kideco becomes a subsidiary of Indika and/or the proposed new investments are completed and show a track record of generating returns similar to Kideco's. Conversely, a negative rating action may be taken if the dividend flow from Kideco is curtailed, the new investments produce weak returns and/or there are material adverse changes to the terms of the proposed notes.

The expected recovery rating of 'RR4' assigned to the proposed notes reflects Fitch's view that the 46% stake in Kideco, the major asset available to the noteholders in the event of default by Indika, will likely provide a recovery rate exceeding 30% of the value of its outstanding debt. This threshold may be achieved even if Kideco's reserves of relatively higher calorific value of 243 million tons as at end 2006 are valued at a distressed level of USD1.25 per ton.

Indika, established in 2000, is a privately-owned investment holding company. Its major investment assets include a 46% stake in Kideco and a 100% stake in Tripatra. Kideco, the major cash flow provider to the holding company, commenced its commercial operations in 1993, with a 30 year CCOW valid until 2023. The CCOW, which is structured as a contract between Kideco and the Indonesian government and ratified by the Indonesian Parliament, will prevail above other Indonesian laws and also provide for international arbitration in the event of a dispute. Fitch notes that this framework has existed for nearly 25 years, and has withstood considerable political and economic turmoil in Indonesia. Tripatra is a leading EPC and O&M service provider in Indonesia with a focus on energy and infrastructure projects.