Moody's downgrades Bumi Resources to Caa1

Moody's Investors Service has downgraded the corporate family and senior secured bond ratings of PT Bumi Resources Tbk (Bumi Resources) to Caa1 from B3.

The ratings remain on review, with direction uncertain.

The senior secured bonds are issued by Bumi Capital Pte Ltd and Bumi Investment Pte Ltd, both of which are wholly owned subsidiaries of Bumi Resources.

"The downgrade reflects the increased refinancing risk for BumiResources. The deadline in August for the refinancing of the US$150 million term loan is less than a month away, and the company has yet to complete the potential monetization of its non-core assets," Moody's Vice President and Senior Credit Officer Simon Wong said in an official release.

Moreover, $360 million of loans at PT Bumi Resources Minerals Tbk (BRM, unrated) -- in which Bumi Resources has an 87.09 percent stake -- will mature in September. These loans are non-recourse to Bumi Resources.

As of end-March 2013, Bumi Resources had a cash balance of $90 million and restricted cash of $109 million on a consolidated basis.

The ratings are on review owing to the uncertainty and lack of visibilityrelated to the monetization of Bumi Resources' non-core assets,particularly its stake in BRM. Successful monetization could result in ratings being upgraded again, while failure could see further downward ratings pressure.

"While the sale of assets could be credit positive because it willalleviate some near-term liquidity concerns and improve the company'scredit metrics, the timing and proceeds of such a sale are currentlyunclear," says Wong, also the Lead Analyst for Bumi Resources.

"We expect interest costs to remain high even if Bumi Resourcesrefinances its upcoming debt maturities, given the ongoing uncertainty over its separation from Bumi Plc, which owns a 29.2 percent stake in the firm. We also note that the company will face significant debt maturities again in 12 to 18 months," he adds.

Bumi Resources' debt maturities in 2H 2014 include $375 million of convertible bonds and $150 million of the loan from China DevelopmentBank that falls due in 3Q 2014, and $600 million of the loan from China Investment Corporation (CIC) that matures in 4Q 2014.

The timeframe for the separation of Bumi Resources from Bumi Plc remains unclear. In July 2013, Bumi Plc announced that it had agreed to sell its 29.2 percent stake in Bumi Resources to Bakrie group for $501 million. Bakrie group would subsequently sell its 23.8 percent stake in Bumi Plc to an affliate of PT Borneo Lumbung Energi & Metal Tbk (unrated).

Because this new proposed transaction differs from the deal approved by shareholders in Bumi Plc's Extraordinary General Meeting in June 2013, it could face resistance from some of Bumi Plc's shareholders. In February 2013, Bumi Plc signed an agreement to divest its entire 29.2% stake in Bumi Resources to Bakrie group for $270 million and buy back Bakrie group's 23.8% stake in the company.

Furthermore, Moody's expects little improvement in Bumi Resources' ability to generate internal cash from its coal operations in 2H 2013,as market conditions are likely to remain challenging. With the Newcastle coal price falling below $80 per ton in July and seaborne thermal coal supply continuing to outpace demand, the company's selling prices are likely to remain correspondingly weak.

Moody's review will focus on Bumi Resources' ability to refinance its scheduled near-term maturities and reduce its debt level through asset sales.

Moody's would consider upgrading the ratings if Bumi Resources can raise funds or refinance its maturing debt in 2013 and 2014 in a timely manner, and lower its leverage by selling assets.