The Bakrie family’s attempt to convert $1.3 billion of debt into equity at Indonesia’s PT Bumi Resources and exit a venture founded with U.K. financier Nathaniel Rothschild is being stymied by slumping coal prices.
The yield on 10.75 percent Bumi Resources notes due October 2017 surged 538 basis points this year to 30.04 percent, adding 69 basis points since Feb. 19, when the Bakries asked for more time to complete the separation. Power-station coal at Australia’s Newcastle port fell 9.8 percent since Dec. 31, erasing a 9 percent rally in the previous six months and taking its three-year drop to 41 percent.
The Bakries have sought at least three delays since agreeing an exit from their London-listed venture with Rothschild, which unraveled amid allegations of fraud, bad faith and e-mail hacking. Jakarta-listed Bumi Resources is also trying to complete a plan to swap coal assets to repay $1.3 billion owed to China Investment Corp., China’s sovereign wealth fund.
“The business is challenging given where coal prices are at, plus it’s a highly leveraged credit and not to mention the never-ending separation saga,” Rohit Gadkar, an emerging markets portfolio manager at Trea Capital Partners SV in Barcelona, which oversees about 1 billion euros ($1.4 billion) of assets, said in a Feb. 20 interview. “The bonds are at distressed levels for me and a lot of people have reduced their positions in case something goes wrong.”
Gadkar said he had bought Bumi bonds, now trading at 59.1 cents on the dollar, betting they will rise by as much as 20 cents in the coming months. The notes are unlikely to return to par, he said. Driehaus Capital Management LLC sold its holdings a year ago, Chicago-based fund manager K.C. Nelson said by e-mail on Feb. 20. Bumi has $1.3 billion of bonds and interest to repay in 2014, according to data compiled by Bloomberg.
The Bakrie-Rothschild saga has had “no impact” on Bumi, its Jakarta-based director Dileep Srivastava said by e-mail on Feb. 20. The Indonesian miner’s plan to swap stakes in its thermal coal units is in progress and Bumi will probably issue new shares to CIC next quarter, Srivastava said.
The yield on Bumi’s 2017 notes rose for 17 days through yesterday before falling two basis points today, narrowing the spread over Treasuries to 2,797 basis points. That compares with premiums of 458 basis points, or 4.58 percentage points, for similar-maturity debt of China’s Yanzhou Coal Mining Co. and 249 basis points for securities due 2019 sold by local peer PT Adaro Energy. The premium on distressed emerging-market debt averaged 1,651 basis points on Feb. 21, according to a Bank of America Merrill Lynch index.
In response to falling prices, Indonesia will limit coal output to 400 million tons this year, 5 percent less than in 2013, Edi Prasodjo, coal business director at the Energy and Mineral Resources Ministry, said in a Feb. 7 interview. Miners relying on raising production volumes to support debt repayment will be most affected if Indonesia “strictly implements” the caps, Fitch Ratings Ltd. said in a Feb. 21 statement.
The Bakries’ plan to exit London-listed Bumi Plc, now renamed Asia Resource Minerals Plc, was unveiled in October 2012. It called for the Bakrie group to buy back a 29.2 percent stake in Bumi Resources for $278 million. Meanwhile, ARMS Chairman Samin Tan is to buy 23.8 percent of ARMS from the Bakries for $223 million.
“Bumi’s problems have little or nothing to do with a weak coal price,” Rothschild said in an e-mailed statement today. He said that if Bakrie fails to honor the terms of the separation agreement then the ARMS board needs to call an extraordinary meeting at Bumi Resources to overhaul management and work with creditors to salvage the business.
The Bakries had only raised $163 million and requested an extension to Feb. 26 and a revision of the terms of the deal, according to a Feb. 19 statement from ARMS. The timetable for the separation plan has been pushed back at least three times in the past six months, according to regulatory filings.
“The separation plan will likely get done but bond prices may fall as the company faces high refinancing risk over the next six months,” Annisa Lee, a credit analyst in Hong Kong at Nomura Holdings Inc., Japan’s largest brokerage, said in an e-mail interview on Feb. 20. “We have a sell recommendation on the bonds. There is uncertainty over the outcome of its restructuring.”
Bumi’s 12 percent bonds due November 2016 traded at 59 cents on the dollar to yield 37.27 percent, according to data compiled by Bloomberg. The yield has surged 7.65 percentage points this year.
The latest delay should not come as a shock to the market after a string of setbacks, Sandra Chow and Cheong Yin Chin, Singapore-based analysts at CreditSights Inc., wrote in a Feb. 19 note. CreditSights has a “market perform” rating on Bumi’s 2016 and 2017 notes.
“The distressed yields on both bonds seem fair compensation for the lack of visibility over its refinancing and restructuring plans,” Chow said in a Feb. 21 e-mail.
The Bakrie family owns or has indirect stakes in 10 companies from coal to palm oil and property listed on the Indonesian stock exchange. Those companies have seen a 21 percent drop in their combined market value since the end of 2012. That compares with a 12 percent increase in the total capitalization of the Jakarta Composite index. The interests in Bumi Resources, PT Bumi Resources Minerals and PT Berau Coal are all held through the Bakrie stake in ARMs.
The rupiah plunged 21 percent against the dollar in 2013, compared with drops of 6.7 percent in Malaysia’s ringgit and 7.5 percent in the Philippine peso, on concern over Indonesia’s current-account deficit. The rupiah has rebounded 4.3 percent this year on improving economic data, while the cost of insuring five-year government debt using credit-default swaps has fallen 28 basis points to 205, according to CMA.
There was a “high probability,” of a near-term default by Bumi over the next 12 months, Moody’s Investors Service said in an Oct. 11 statement. The company has a 2.43 percent chance of defaulting in a year, according to Bloomberg data, compared with 0.79 percent for Yanzhou Coal and 0.8 percent for Adaro.
“We’re not bullish on the coal sector,” said Ariyanto Kurniawan, a Jakarta-based analyst at PT Mandiri Sekuritas, a unit of Indonesia’s largest lender by assets. “It’s probably not optimal for Bumi to sell their assets now because of where the industry cycle is.”