• Miner offers to repurchase $100 million of 2018 dollar bonds
  • Moody's may downgrade rating depending on offer discount

An offer by Indonesian coal miner PT Indika Energy to buy back as much as a third of $300 million of dollar bonds could be considered a distressed exchange, reduce the company’s liquidity as coal prices keep dropping and threaten its ratings, credit scorers said.

Singapore-based Fitch Ratings analyst Buddhika Piyasena said Tuesday the proposed repurchase of the 2018 notes could add pressure to the company’s finances. On the same day, Moody’s Investors Service said it may downgrade the firm’s B2 credit score if the discount applied to the buyback is at the low end of what it’s offered investors.

Bonds of mining companies have accumulated further losses after the Bloomberg Commodity Index hit the lowest since 1999 on Nov. 20. The move has opened the opportunity for cash-strapped Indonesian miners Indika and PT Berau Coal Energy to cut their debt with offers to repurchase bonds at deep discounts to face value.

"For any company in the coal sector with a stressed financial profile, liquidity is king," Fitch’s Piyasena said by phone on Nov. 24. "I would look at it quite negatively if they used their cash balance fully for this buyback because you want companies like these to have enough cash on hand."

Wishnu Wardhana, president director in Jakarta at Indika Energy, didn’t immediately return two calls seeking comment.

Reverse Auction

Indika announced on Nov. 23 that investors could return up to $100 million of bonds in a reverse auction with the minimum offer price set at 60 cents on the dollar and maximum at 65. The offer expires on Dec. 21. If the transaction is successful, Indika will pay the amount set at the auction, plus 5 cents on the dollar per bond returned before an early bird deadline on Dec. 7.

The possibility that creditors may lose 40 percent of the face value on the notes prompted Moody’s to put the company on watch for a potential downgrade. The credit scorer "will focus on the amount of loss incurred by participating noteholders," said Brian Grieser, a Hong Kong senior analyst. 

Indika’s cash balance fell to $303.7 million on Sept. 30 from $332.7 million at the end of 2014, latest results show. It’s likely to pay for part of the expenses of the buyback using bank loans, according to Fitch’s Piyasena. 

The company’s $300 million of 7 percent bonds due 2018 climbed 0.1 cent to 60.36 cents in the dollar at 11:39 a.m. in Jakarta.

Downgrades

Indika reported $177.6 million in short-term loans at Sept. 30, more than twice the amount it had at the end of 2014. Its trade payables, which are seen as credit offered by suppliers, rose to $140.3 million in the period.

Fitch downgraded Indika to B, five notches below investment-grade, and kept its outlook at negative on July 22 citing its "expectation of sustained weak credit metrics." Moody’s made a similar move on Aug. 24, lowering its score to B2.

"In the next 12 to 18 months the key thing we’ll be looking at is how much liquidity is there," Piyasena said. "As you come down the ratings scale, leverage becomes less relevant and things like liquidity take more relevance and importance, and that’s exactly where we are with Indika."

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