Moody's comment negative for Delta Makmur

Moody's Investors Service notes the news concerning a possible share swap between parent PT Delta Dunia Makmur Tbk and Recapital Investment Group.

While the proposed transaction is non-binding and is only in preliminary stages of negotiation, Moody's notes that it may have potential negative ramifications for PT Bukit Makmur Mandiri Utama Ba3 corporate family and senior secured bond ratings depending on the final shareholding structure and management of the potential Change of Control covenant.

Delta Makmur plans to launch a IDR10 trillion rights issue which is expected tobe substantially taken up by Recapital, according to the Delta Makmur's recent announcement. At the same time, an affiliate of Recapital will issue a Mandatory Exchangeable Bond (MEB) which will be exchangeable at maturity (expected to be April 2011) into shares in PT Berau Coal Energy. The MEB is to be taken up by Delta Makmur.

Delta Makmur is currently 40% owned by a consortium led by Indonesian private equity firm, Northstar Equity Partners. Recapital currently wholly owns Berau Coal Energy, which in turn owns a 90% stake in PT Berau Coal, Indonesia's fifth largest coal producer.

Post the share swap, Delta Makmur will be the direct majority shareholder in Berau Coal Energy and Recapital will be a direct substantial shareholder in Delta Makmur.

"The transaction should cement further the relationship between Bukit Makmur and Berau given that the former accounts for some 77% of Berau's coal production, although there should be no adverse operational or financial impact on Bukit Makmur, given the effective locked-box around the company post its loan and bond financing in October 2009," says Laura Acres, a Moody's Vice President and Senior Credit Officer, today.

"However, the Bukit Makmur loan agreements contain a change of control clause at the Northstar to Delta level which requires a minimum 40% shareholding. If the transaction goes ahead as outlined with Recap taking up substantial share of Delta's rights issue, it will result in a dilution of Northstar's stake in Delta which may trigger the change of control clause on the loan and hence the cross default on the bonds unless Bukit Makmur can negotiate a waiver from its banks," adds Acres, also Moody's Lead Analyst for Bukit Makmur.

Whether Bukit Makmur's rating will be affected depends on whether the change of control situation will materialize and if so, if the company manages to negotiate for a waiver or come up with a package that can satisfactorilyaddress the cross default risk.

As such, Moody's will closely monitor the situation. Buma's ratings were assigned by evaluating factors we believe arerelevant to the credit profile of the issuer, such as i) the businessrisk and competitive position of the company versus others within itsindustry, ii) the capital structure and financial risk of the company,iii) the projected performance of the company over the near to intermediate term, and iv) management's track record and tolerance forrisk.