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Cautious creditors delaying Southeast Asian coal miners from restructuring debt

Coal miners in Southeast Asia are finding it difficult to take advantage of the current uptick in thermal coal prices to restructure their debt, with many of their creditors skeptical that the commodity will remain at the current price level for a sustainable period, analysts say.

This is despite increased interest among coal miners in the region to engage in shredding debt after Indonesian coal major PT BUMI Resources Tbk. recently completed a US$4.2 billion debt restructuring deal, according to S&P Global Ratings credit analyst Vishal Kulkarni. "What's driving [the uptick in debt restructuring] is the current coal price scenario. There are some indications of reasonable cash flows," said Kulkarni.

While more companies may yet follow BUMI Resources' lead in restructuring debt, Kulkarni said that so far the Indonesian coal producer is the only company in the region which has publicly announced the completion of such an undertaking.

"[Bumi Resources' deal] was a good example of a restructuring for [companies to follow]," Kulkarni said, adding that the recent coal price improvements have changed the expectations of creditors in the market. "They could be wanting more returns, which will delay the process," he said.

William Simadiputra, a coal analyst with Singapore's DBS Vickers, agreed that he was not aware of any other coal miners in the region which have completed a restructuring deal similar to Bumi Resources'.

Simadiputra said creditors in the region are generally finding it difficult to believe that coal prices will remain at high levels over the longer term.

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"Creditors are becoming more and more careful because of what happened in the past," Simadiputra said, referring to the high nonperforming loans booked among mining companies as well as the coal price slump between 2012 and 2014.

Coal miners are now sitting on healthy debt ratios that are far below their historical levels, which also means that restructuring is not a priority for local producers, according to Simadiputra.

Kulkarni noted that it has been stronger earnings from higher coal prices, rather than the repaying of debt, that has driven a reduction in leverage across the region. "Cash has not been used to repay debt. Funds are used to fund CapEx, acquiring other mining deals, and paying mining contractors for past operations," Kulkarni said.

The analyst said coal miners in Southeast Asia may face volatility in their earnings going forward, given that their earnings are sensitive to coal prices.

Eyeing the big leagues

Southeast Asia's coal producers tend to be price takers in the seaborne market due to their small production scale, Kulkarni said. "The focus on production growth is the key factor [in reducing this sensibility]. They can't do much about the cost or coal quality," Kulkarni added. "The only thing they can do and they have been doing is to improve production, especially the smaller ones."

This includes Geo Energy Resources Ltd., which owns three coal projects in Indonesia and produced around 7 million tonnes of coal in 2017. The miner is on track to produce between 11 million tonnes and 12 million tonnes of coal this year, according to Investment Director Adam Tan. Tan said that the company is also considering acquisitions to further expand its scale.

Bumi Resources is also looking to increase its annual output to around 100 million tonnes in 2019 from around 85 million tonnes in 2017, even though the recent restructuring deal will require the company to use all of its cash to pay interest, Director and Corporate Secretary Dileep Srivastava previously told S&P Global Market Intelligence.

Coal miners in Southeast Asia are also eager to engage in M&A and to ramp-up production to maintain the ability to service the interest on outstanding debt, according to Chen Guangzhi, a Singapore-based investment analyst with Phillip Securities Research.

Chen points to Geo Energy, which issued senior notes of US$300 million in September 2017 carrying an annual interest rate of 8%. "Based on the current production level, it is quite difficult for [Geo Energy] to generate net profit after they pay back the interest," said Chen.

Meanwhile, DBS Vickers' Simadiputra warned that companies are making very conservative coal price assumptions in their mining budgets, which may cause them to be equally conservative in planning for growth in output. "It is a bit early to say if measures taken by these companies [to improve balance sheet strength] would be effective," said S&P's Kulkarni.

S&P Global Ratings and S&P Global Market Intelligence are both owned by S&P Global Inc.