Indika Energy Tbk PT : Fitch Assigns Indika Energy Positive Outlook on Higher Coal Prices

[Press Release] Fitch Asslp lrdka Energy Posftlve Outlod

PT lndlka Energy Tbk(lgwwlen/esp/lnr/85309273)

FitchRatings

Fitch Assigns lndika Energy Positive Outlook on Higher Coal Prices

Fitch Ratings-Singapore-06 March 2017: Fitch Ratings has affinned Indonesia-based PT lndika Energy Tbk's (lndika) Long­ Term Foreign- and Local-Currency Issuer Default RaUngs (IDR)at 'CCC' and assigned a Positive Outlook. lndlka's senior notes due 2018 and 2023 have also been affirmed at 'CCC' with a Recovery Rating of 'RR4'.

The Positive Outlook reflects Fitch's expectaaonofImprovement In lndlka's cash flows due to higher thermalcoalprices. Fitch revised Its mid-cycle price assumptions for thermal coalon 2 March 2017. We belleve the highercash generation has substanUallyImproved the company's ablllty to refinance Its 2018 notes, and the needfor any debt restructuring has receded

slgnlflcantly.We are lllcely to upgrade lndlka's ratings to'B-'shouldthe company successfully refinance Its 2018 notes. ThisIs provided such refinancing does not significantly raiseIts annual debt refinancing needs and can be managed comfortably withinforecast cash generation at the lndlka level(holdlng company onastandalone basis),and maintains a sufflclentlylarge cashbalance at lndlka-level to supportoverall lquldlty.

KEY RATING DRIVERS

Updated Coal Price Assumptions:Fitch has increased the 2017 price for thermalcoal - Newcastle 6,000 kcal- to USD70/metric tonne (mt) (from USD57), and assume USD65/mt thereafter (from USD60) (see Updating Fitch's Commodity Price Assumptions published on 2 March 2017: https://www.fitchratings.com/site/re/895103).Prices have comeoff the peak reachedinlate 2016, but ourincreased mid-cycle price assumptions reflect China's policies aimed at managing coal production and prices.We expect some production uptick inAustralia, China and Indonesiain response to higher prices, which shouldlead to somefurther moderation in prices as reflected in the updated price assumptions.

Higher Kideco Dividends: Theimprovement in coal prices will drive higher cash generation at PT Kideco Jaya Angung,lndika'e key coal mining asset (Kideco - 46% held by lndika),and consequentlylead to higherdividend flows tolndika. lndika relies heavily on dividends from Kideco. We now assume dividend receipts from Kideco to bearound USD40min 2017 (including a dividend of USD17m received during 4Q16),and to rise further in 2018 to over USD70m in the next year (against previous assumptions of below USD40m) based on our revised coal price assumptions.

Kideco's relatively high production flexibility and capacity (requiring little capex),generally low cash operating costs and absence of any debt support its profitability and pre-dividend free cash generation.Kideco trimmed costs and maintained a low strip ratio during 2016, while we expect the rising oilprices to drive up costs during 2017. Notwithstanding this,Kideco retains its ability to generate stronger cash flows under higher coal prices.

Weak,butImproving Liquidity: Fitch expects higher dividends from Kideco to arrest deterioration in lndika's liquidity profile. We estimate lndika's (entity level)cashflows to be neutralin 2017 and to cover its operating expenses and interest costs without the need to dip into its cash reserves (estimated at around USD150m as of end-December 2016).Thisis also likely to reduce its rel ance onshort-tenn debtin the near term.We expect the situation to improve further in 2018,based onour revised coal assumptions for 2018-2019.

Better Refinancing Ability: We expect the sustained improvementin lndika's cash flows to enhance its refinancing ability, particularly the 2018 notes (USD171m remaining).We believe that a successfulrefinancing - at a cost not significantly higher thanits existing notes and a manageable debt maturity profile which can be accommodated within its forecast cash generation

- will provide the company adequate time to addressits capital structure,with the nextlarge debt maturity the USD500m notes duein January 2023.

Subsidiaries' Cash Generation to Remain Muted:We expect no dividendsin 2017 from lndika's key subsidiaries - 70%ned PT Petrosea lbk (Pelrosea, a mining contractor) and 51%-owned PT Mitrabahtera Segara Sejati Tbk (MBSS,coal barging and handling)-given theirlosses during 2016. We anticipate the higher commodity prices to resultinsome (but only a modest)improvement in the trading performance and cash generation of these subsidiaries during 2017, with a more sustained recovery from 2018. We believe theinvestment needs of these subsidiaries can be self-funded,requiring no financialsupport from lndika.

The revenues of fully owned Tripatra - an engineering, procurement and construction company - declined during 2016,while we expect its order-book to benefit from anincreaseininfrastructure investments inIndonesia, including oil& gas.

DERIVATIONSUMMARY

lndika's 'CCC' rating reflects its weak liquidity and high refinancing risk for its debt maturing in 2018. The Positive Outlook, however, reflects the likely improvement in lndika's cash flows supported by higher coal prices, which consequently enhances its ability to refinance the 2018 debt maturity. We now expect lndika's (entity level) FCF to be neutral in 2017. lndika's ratings are comparable with those of MIE Holdings Corporation (MIE, CCC), which also faces significant challenges in relation o refinancing its outstanding notes due in February 2018 and April 2019. MIE's challenges are more complicated than those of lndika, from its depleted asset base relative to indebtedness which is still high. Yanzhou Coal Mining Company Limited's (Yancoal, B/ Negative) reflects its high financial leverage and weak liquidity; the 'B' IDR, however, incorporates ongoing adequate access to banking and domestic capital markets as a provincial state-owned enterprise.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the company include:

• Coal prices in line with Fitch's mid-cycle commodity price assumptions, adjusted for difference in calorific value (average Newcastle 6000 kcal free-on-board (FOB): USD70/mt in 2017 and USD65/mt thereafter)

• Kideco coal volumes of around 32 million tonnes in 2017 and around 36mt in 2018. Capex remaining low around USD3m in 2017 and around USD5m in 2018 and 2019

• Dividend payout ratio for Kideco remaining high around 95%-98%

• No dividend from MBSS and Patrosaa in 2017, with dividends of around USD5m from Patrosaa in 2018. Dividends from associate PT Cirebon Electric Power of about USD7m per year through to 2018

• Low capax at Tripatra and MBSS, and marginally higher capax at Patrosaa to support new mining contracts resulting in capex of around USD70m in 2017 and declining to around USD50m a year thereafter.

  RATING SENSITIVITIES

  Future Developments Thal May, Individually or Collectively, Lead to Positive Rating Action

• A successful refinancing of its 2018 notes is important for any positive rating action, provided any new debt raised for refinancing does not significantly increase its annual total debt-servicing requirement, such that lndika can manage its liquidity needs within operating cash generation at the lndika level, and maintains a cash balance of at least USD1OOm at the lndika level.

  Future Developments Thal May, Individually or Collectively, Lead to Negative Rating Action

• Failure to refinance the 2018 notes; not meeting the above upgrade guidance

• Any further weakening of liquidity, which may arise from weaker-than-expected coal prices and dividend receipts, and reduced access to credit facilities.

LIQUIDITY

lndika's liquidity position is weak, but likelylo improve with higher coal prices - as stated above. Contact:

Primary Analyst Muralidharan R Director

[phone]

Fi ch Ratings Singapore pte Lid One Raffles Quay

South Tower #22-11

Singapore 048583

Secondary Analyst Isabella Katsumata Senior Director

[phone]

Committee Chairperson Jeong Min Pak

Senior Director

[phone]

Media Relations: Leslie Tan, Singapore, Tel: [phone], Email: [e-mail]; Wai-Lun Wan, Hong Kong, Tel: [phone], Email: wailun.wan@fitchratings. com.

Additional information is available on www.fitchratings. com

Appllcabla Crtterta

Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) (https://www.fitchratings. com/site/re/88766g) Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) (https://www.fitchratings. com/site/re/885629) Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) (https://www.fitchratings. com/site/re/890199)

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