An escalating spat between Indonesia’s famous Bakrie family and Nathaniel Rothschild may spell worries for holders of Bumi Resources’s US dollar-denominated bonds as the possibility that the UK financier might sell his holding company’s stake in coal miner may leave investors worried about corporate governance and transparency.
The Bakries have extended a proposal to Rothschild, who co-founded Bumi Plc, to buy Bumi Plc’s 29% stake in Bumi Resources for US$278 million as well as the holding company’s 85% stake in Berau Coal Energy “within the next six months,” according to The Telegraph. Such a move would sever Bumi Plc’s connections with the Bakrie family’s Bumi subsidiaries, leaving it with a pile of cash and no underlying assets.
The scenario may raise questions among Bumi Resources’ investors about the coal miner’s ability to maintain its corporate governance standards. Some investors may have placed their funds with Bumi Resources because London-listed Bumi Plc’s stake in the coal miner had required it to adhere to more stringent regulations on governance and transparency.
“It’s more related to corporate governance practices going forward. It should definitely be weaker without Rothschild monitoring it. The standard could go further down,” said a Hong Kong-based credit analyst.
Standard & Poor’s credit analyst Xavier Jean agrees. He says foreign bond investors may have taken some comfort that FTSE rules would protect their investments from corruption.
“Some credit investors might not feel comfortable being exposed to a potentially higher ownership from the Bakrie related companies if all assets are going back to Indonesia,” said Singapore-based Xavier Jean, a credit analyst at S&P. “The US dollar capital markets might have taken some support from Bumi Resources being partly owned by Bumi Plc which is listed on the London Stock Exchange, with more stringent transparency and regulatory requirements.”
S&P downgraded Bumi Resources’ long-term corporate credit rating a ‘B+’ from ‘BB-’ on September 26 after Bumi Plc launched an investigation into the potential financial irregularities in its Indonesian operations, particularly in Bumi Resources. The coal miner met with Indonesia’s capital markets regulator Bapepam-LK last month.
The probe highlighted the rising friction between the Bakrie family and Rothschild, which had also made it difficult to make decisions on corporate strategies. The lack of leadership had also acted as a credit negative, said S&P’s Jean.
“The deleveraging strategy, the execution of asset sales - a lot of these different initiatives have been complicated by the ownership structure, as different shareholders may have had different agendas. Deleveraging has taken more time than we had anticipated, and the execution of non-core asset sales is affected by potentially diverging views from each shareholder about fair value,” said Jean.
Although the Bakrie family’s majority stake may accelerate decision making in tackling such matters, the possibility that the family may leverage its subsidiaries such as Berau Coal Energy to buy Bumi Plc’s stakes will also become a problem for bond investors.
“What you could see with one single owner, which kind of has the decision making power, but that takes creditor-unfriendly initiatives by basically purchasing the shares using the underlying company’s balance sheets and that would be a credit negative,” said another credit analyst. “The relatively less-leveraged balance sheet of Berau Coal Energy could be used to raise debt to purchase the shares and that would be credit negative for the profile of Berau Coal Energy because that would be more debt for the same amount of cash flows generated.”
Berau Coal would have to take on more debt because Bumi Resources’ bond covenants would prevent the company from helping the Bakries fund the acquisitions. Berau Coal may have room on its balance sheet to take on as much as US$500 million at 10% in interest in additional debt without breaching its bond covenants, said the analyst.
But the negative outlook of the coal industry will make the increase in Berau’s debt of this magnitude credit negative, he added.
Bumi Resources’ outstanding debt includes a Credit Suisse US$290.2 million loan due September 2013 and a US$100 million principal on a facility this year extended to Bumi Resources Minerals that can be extended to September 2013.
It refinanced early US$600 million of a US$1.9 billion loan from China Investment Corp. (CIC) in November 2011. This first tranche was originally to be paid in October 2013.
Bumi Resources also agreed to pay a steep coupon rate of 19% when it took out the loan on September 2009. It saved itself US$72 million in annual interest payments by refinancing the first chunk last year, but still owes a second and a third tranche, worth US$600 million and US$700 million, respectively. These are due in 2014 and 2015. It also received a US$185 million credit facility from India’s Axis Bank.