Indonesia Coal Is on Fire; New China Deal to Help in 2021

Asia Fixed Income Analyst

Derek Silva

Credit

<p>While Asia High Yield has had plenty of new issues this year, Indonesian credits have remained quiet in the primary market. Until now. Last week, the Indonesian coal miner Indika Energy (bond ticker: INDYIJ) issued a new bond which will be used to refinance its upcoming 2022 maturing bond and partly refinance its 2023 maturing bond.</p><p>Among Indika’s peers, Bukit Makmur Mandiri Utama (known as ‘BUMA’, bond ticker: DOIDIJ) stands out as an interesting comparable, as it also has a bond maturing in 2022, offering a massive 22% yield to maturity. Trading at a cash price around 84, there is clearly scepticism about BUMA’s ability to refinance the $350m bond.</p><p>BUMA had been a stable, boring credit with good fundamentals, and indeed the bond had been pretty consistently trading above par (100), including the whole 14-month period prior to Covid-19 from January 2019 to March 2020. But Covid-19 dealt a blow at a bad time, just as the refinancing window was getting closer. Volumes in Indonesian coal mining dropped and BUMA’s H1 results showed a resulting 19% fall in revenue and 8% decrease in EBITDA.  </p><p>BUMA has enough liquidity to survive the next 12-18 months while also generating positive free cash flows, even in a weak economic environment, due to its capex flexibility. Indeed, despite the fall in revenue and earnings, net leverage has remained low and free cash flow actually grew, thanks to this flexibility.</p><p>Prior to Covid-19, the Indika and BUMA bonds, with only two months difference in maturity, were trading at a very tight spread differential. But now the difference is huge. The two issuers have similar credit fundamentals and the same credit ratings (Ba3, BB-), so the new bond from Indika could be a positive sign for BUMA. It doesn’t guarantee that BUMA will be able to refinance its own 2022 bond, but it reveals that the market is open and hungry for yield, and the bond should trade higher on this development.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/165/782/original/Screenshot%202020-10-18%20at%2017.40.30.png?1603017662" class="editor-image img-responsive" data-smartkarma-image-id="165782"></figure><div class="content-caption">Indika 2022 and BUMA 2022 bonds traded at a tight spread differential prior to Covid-19</div></section>

While Asia High Yield has had plenty of new issues this year, Indonesian credits have remained quiet in the primary market. Until now. Last week, the Indonesian coal miner Indika Energy (bond ticker: INDYIJ) issued a new bond which will be used to refinance its upcoming 2022 maturing bond and partly refinance its 2023 maturing bond.Among Indika’s peers, Bukit Makmur Mandiri Utama (known as ‘BUMA’, bond ticker: DOIDIJ) stands out as an interesting comparable, as it also has a bond maturing in 2022, offering a massive 22% yield to maturity. Trading at a cash price around 84, there is clearly scepticism about BUMA’s ability to refinance the $350m bond.BUMA had been a stable, boring credit with good fundamentals, and indeed the bond had been pretty consistently trading above par (100), including the whole 14-month period prior to Covid-19 from January 2019 to March 2020. But Covid-19 dealt a blow at a bad time, just as the refinancing window was getting closer. Volumes in Indonesian coal mining dropped and BUMA’s H1 results showed a resulting 19% fall in revenue and 8% decrease in EBITDA.  BUMA has enough liquidity to survive the next 12-18 months while also generating positive free cash flows, even in a weak economic environment, due to its capex flexibility. Indeed, despite the fall in revenue and earnings, net leverage has remained low and free cash flow actually grew, thanks to this flexibility.Prior to Covid-19, the Indika and BUMA bonds, with only two months difference in maturity, were trading at a very tight spread differential. But now the difference is huge. The two issuers have similar credit fundamentals and the same credit ratings (Ba3, BB-), so the new bond from Indika could be a positive sign for BUMA. It doesn’t guarantee that BUMA will be able to refinance its own 2022 bond, but it reveals that the market is open and hungry for yield, and the bond should trade higher on this development.Indika 2022 and BUMA 2022 bonds traded at a tight spread differential prior to Covid-19

Did Indika Just Crack the Door Open for BUMA?

Delta Dunia Makmur

Did Indika Just Crack the Door Open for BUMA?