Berau meet with bonds investor

PT Berau Coal, the Indonesian mining company, started meetings with investors in Hong Kong for sale of dollar-denominated bonds.

Berau will market five-year notes to investors in Singapore on June 24 (today) and in London and the U.S. later this month.

The company has $300 million in loans maturing this year and the dollar notes received a provisional B2 rating from Moody's Investors Service.
Credit Suisse Group AG and Deutsche Bank AG are arranging the sale, which will be used to refinance an existing loan.

Moody's Investors Service has assigned a provisional (P)B2 corporate family rating to Berau Coal. At the same time, Moody's has assigned a provisional (P)B2 senior secured bond rating to the proposed senior secured notes issued by Berau Capital Resources Pte Ltd, which is wholly owned by PT Berau Coal Energy (BCE). The outlook on both ratings is stable.

BCE is a 90% shareholder of Berau. The bonds are guaranteed by BCE and its subsidiaries, which includes Berau. BCE intends to raise a USD bond offering and a bank loan facility, to partially refinance the bridge loans for the acquisition of Berau by Recapital Advisors.

The provisional status of the ratings will be removed upon completion of the bond issuance and bank loan. If the debt financing plan fails to go ahead, the ratings will be under pressure in view of Berau's refinancing risk and weak liquidity profile.

"Berau's B2 ratings reflect its status as one of the world's lowest-cost producers and exporters of coal, and the quality of its customer base, comprising large utilities with excellent payment records," says Laura Acres, a Moody's Vice President and Senior Credit Officer."Its coal mines also have a long concession life and well establishedoperations, with a track record of consistent production growth," adds Acres."Among the key challenges Berau faces are its exposure to commoditycycles for both coal sales and fuel procurement, leading to earnings and cash flow volatility, although this can be partially mitigated by a policy of locking sales prices in up to one year in advance.""The rating also recognizes the company's lack of diversification, given its single concession and product, as well as the high level of concentration risk, given that its top ten customers account for approximately 83% of revenues," says Acres, also Moody's Lead Analyst for the company.

Moody's is also concerned over the high level of acquisition debt across the extended group, which relies primarily on cash flows from Berau to service its debt. This is exacerbated by the near term liquidity risk due to US$580 million of vendor notes, incurred as part of the acquisition, which are due in December 2010.

Moody's has therefore included such debt in computing the adjusted ratios for Berau Coal, resulting in an expected, adjusted debt/EBITDA of 5.0x in FY2010, compared to 2.4x if only guaranteed debt is included.

As such, the company's strong pre-acquisition credit metrics have been weakened considerably by the debt adjustment, such that its adjusted leverage will be more line with that of its B-rated coal mining peers.

"We're also concerned about the risk appetite of the new shareholders, as well as the lack of clarity regarding long-term strategy for Berau, given Recapital's role as a financial investor," Acres adds.

The stable outlook reflects the expectations that Berau will implementits business plan and maintain its competitiveness in the near to mediumterm.Upward rating pressure could emerge if Berau expands its production capacity, such that a sustainable improvement in the underlying business model (driven by improved operating performance from increased production) develops.