Fitch Rates Bukit Makmur Mandiri Utama's Proposed Sukuk at 'A+(idn)'

Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'A+(idn)' to PT Bukit Makmur Mandiri Utama's (BUMA, BB-/A+(idn)/Stable) proposed sukuk of up to IDR2.0 trillion. The proceeds from the issuance will be used for capital expenditure, including on heavy equipment, and for working capital.

The Stable Outlook on BUMA's rating reflects Fitch's expectation that its EBITDA net leverage and overall financial profile will remain consistent with its rating. BUMA's higher post-acquisitions net leverage is offset by improved business and geographical diversification as well as reduced concentration in its current coal contracting services, which is highly exposed to thermal coal.

'A' National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Rating on Sukuk

The sukuk issuance is rated at the same level as BUMA's National Long-Term Rating as it represents the issuer's senior unsecured obligation and ranks pari passu with its other senior unsecured debt.

We have not considered any underlying assets provided when assigning the rating, as we believe the issuer's ability to satisfy payments due on the proposed sukuk will ultimately depend on the issuer satisfying its unsecured payment obligations to the trustee under the transaction documents described in the prospectus and other supplementary documents.

In addition to BUMA's propensity to ensure repayment of the sukuk, in Fitch's view, the entity would also be required to ensure full and timely repayment of the sukuk's obligations due to its various roles and obligations under the sukuk structure and documentation, especially - but not limited - the features explained below.

• Pursuant to the agency agreement, BUMA as servicing agent will ensure sufficient funds are available to meet the ijara returns installments payable by the trustee under the certificates on each ijara returns installment date. BUMA can take other measures to ensure that there is no shortfall and that the payment of principal and profit are paid in full, and in a timely manner.
• At each payment/maturity date, the entity is obliged to repay the ijara returns installments and/or remaining ijara returns in full. The entity will be obliged to provide compensation in the event of late payment, which includes the accrued and unpaid ijara returns installments.
• The payment obligations of BUMA (in any capacity) under the transaction documents will be direct and unconditional, and shall at all times rank at least equally with all other unsecured and unsubordinated obligations of BUMA, present and future.
• Failure to pay the sukuk income and/or the principal of the sukuk ijara on the designated payment dates constitutes an event of default.
• The sukuk documentation includes financial reporting obligations, covenants, a negative pledge provision, and default acceleration terms.
• BUMA represents and guarantees that all risks of damage or loss of the ijara object or events causing the depreciation of the ijara object will be the responsibility of BUMA. In the event of force majeure or the ijara object cannot be used/utilised or there is a decrease in the value of the ijara object, BUMA will replace it with a substitute ijara object owned or controlled by BUMA with an amount corresponding to the transfer value of the ijara object which is the remaining value ijara rewards.

The transaction will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch's rating on the certificates reflects the agency's belief that BUMA would stand behind its obligations.

When assigning ratings to the certificates to be issued, Fitch does not express an opinion on certificates' compliance with sharia principles. If a team of Sharia experts determines that the sukuk ijara no longer form Sharia securities, the sukuk ijara will become accounts payable based on the Sharia Compliance Statement issued to the trustee, and BUMA is obliged to settle the amount of the remaining ijara benefits, installments that have not been paid, and compensation for losses (if any).

Rating on BUMA

Lower Rating Headroom: Fitch expects BUMA to remain opportunistic about acquisitions to achieve its target of at least 50% non-thermal coal revenue by 2028. BUMA's narrower rating headroom means significant debt-funded acquisitions in the future that are not balanced by near-term EBITDA inflow may increase negative pressure on the company's rating. Fitch would consider any such acquisition as an event risk. BUMA's past M&A, thus far, have been positive for its credit profile.

Improved Diversification: BUMA's proposed acquisition of a 51% stake in Dawson Coal Mining Complex (Dawson Complex) will improve BUMA's diversification and reduce the concentration in its current coal contracting services, which are highly reliant on thermal coal.

Fitch expects BUMA's upstream EBITDA contribution, mainly from metallurgical coal in Dawson Complex as well as its recently purchased ultrahigh-grade anthracite coal operations in the US, to increase to around 40% (2023: nil) while EBITDA contribution from Australia will also increase to over 40% (2023: 21%).

Higher Leverage: Upon the close of Dawson Complex transaction, which BUMA expects in 2H25, BUMA's EBITDA net leverage would likely stay at around 3x in 2026 (last 12 months to June 2024: 2.4x), factoring in the full-year earnings contribution. This leverage level is higher following the acquisition but remains below our negative leverage sensitivity of 3.3x.

Cashflow Accretive Acquisition: BUMA's management expects leverage to decline with the healthy cash generation of Dawson Complex, which is a producing asset and is on the second quartile in terms of cost position for hard coking coal, according to CRU.

Manageable Volume Replacement Risk: BUMA's strong market position, proven record in operations and expertise in managing large, complex mines give it a competitive edge in securing new contracts or expanding existing ones. In 2024, it secured new long-term contracts as well as extensions in Indonesia and Australia that can help to offset declining volume from the contract with one of its largest customers, PT Berau Coal Energy, which expires in 2025 as Berau's reserves depletes.

The new contracts secured include a mining service agreement with PT Persada Kapuas Prima, worth around IDR12 trillion. BUMA also extended its contract with TEC Coal Pty Ltd, valued at about AUD200 million per year, and its IDR107.8 trillion contract with PT Indonesia Pratama, a subsidiary of PT Bayan Resources, which is among the largest coal producers in Indonesia.

Derivation Summary

BUMA's rating compares to that of Australia-based Emeco Holdings Limited (BB-/Stable). We assess BUMA's business profile as stronger due to higher earnings visibility from its longer-term mining services contracts and its better diversification, both in terms of geography and earnings from upstream mining. However, Emeco maintains a conservative balance sheet, which offsets its weaker business profile.

BUMA is rated one notch above PT ABM Investama Tbk (B+/Stable) due to a better business profile. This is due to BUMA's larger market share, stronger customer base and wider geographical footprint.

BUMA's national rating is similar to that of PT Indika Energy Tbk's (Indika, BB-/A+(idn)/Stable). Indika is highly reliant on its thermal coal mining subsidiary, Kideco, for cash flow generation until 2026 when its gold mining operation commences. In contrast, BUMA has better earnings and geographical diversification. However, this is offset by Indika's stronger balance sheet than BUMA.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer:

• Metallurgical coal prices in line with Fitch's price deck as follows: USD190/tonne in 2025 and USD180/tonne each in 2026 and 2027;
• Indonesia overburden volumes range from 400 million-410 million bcm between 2024 - 2027; overburden volumes for Australia averages at 165 million bcm between 2024-2027;
• Consolidation of Dawson Complex from 2H25;
• Average annual capex of around USD180 million in 2024 and USD300 million-350 million per year after acquisition of Dawson Complex
• Average annual dividend of around USD35 million over 2024-2027.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

• Negative rating action on BUMA's National Long-Term Rating will lead to similar action on the sukuk rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

• Positive rating action on BUMA's National Long-Term Rating will lead to similar action on the sukuk rating.

The sukuk rating could also be sensitive to changes to the roles and obligations of BUMA under the sukuk's structure and documents.

Sensitivities for the National Long-Term Rating of BUMA:

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

• A weakening market position, including weak execution of its business strategy, and/or failure to obtain new customers to replace expiring contracts;
• Indications of an overly aggressive approach towards non-thermal coal-related diversification;
• Evidence of weakened external funding access;
• EBITDA net leverage above 3.3x for a prolonged period.
• Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
• An upgrade appears unlikely in the near term, as the company's business profile is evolving as it transitions towards a more diversified earnings base. However, a material improvement in BUMA's business diversification beyond coal-related operations, while maintaining an appropriate financial profile, may lead to an upgrade.

Liquidity and Debt Structure

BUMA's liquidity remains sufficient, with no significant debt repayment obligations until the maturity of its USD212 million bond in 2026. BUMA's cash balance of USD194 million as of September 2024 was sufficient to cover its short-term debt of USD80 million (USD131 million including lease liabilities). BUMA has also raised IDR1 trillion via rupiah bonds (about USD62 million) in October 2024.

Issuer Profile

BUMA is a subsidiary of PT Delta Dunia Makmur Tbk. It provides coal mining services and carries out mining-related works, including overburden removal, coal mining and coal hauling in Indonesia and Australia. BUMA also produces anthracite coal in the US and is in the midst of acquiring a 51% stake in Australia-based Dawson Coal Mining Complex, which produces metallurgical coal.

Date of Relevant Committee

24 January 2025

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Source : fitchratings.com