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The company is expected to report its delayed third-quarter earnings in the next few days, and its cash position will be among the most important items investors are watching. According to the source, the company’s cash on hand had deteriorated to US$250m–$270m by the end of the third quarter, down from US$343m a quarter ago.

The speed of cash depletion is much worse than many investors had expected. Charles Macgregor, head of Asia for Lucror Analytics, had estimated a burn rate of US$20m–$50m per quarter.

As a result, the company is likely to come up with a restructuring plan soon to extend the maturities of its US$450m 12.5% notes due in July 2015 and US$500m 7.25% bonds due in 2017.

“The company doesn’t have enough resources to exchange the notes at par,” the source said. “It’s going to default if it doesn’t restructure its debt soon as the coal prices are not going to recover anytime soon.”

 

Refinancing delays

The uncertainty about the debt repayment plans has caused a nosedive in its bond prices and raised expectations of a debt exchange.

Trading in Berau’s 2015s has been a wild ride. From above par in early September, the paper was indicated around mid-market 54.25 as of Friday, after a 20-point slump in a single day the previous week. The 2017s were indicated at mid-market 51.75.

“This is a result of the fact that investors don’t like uncertainty, and the company’s poor management of investors,” said a Singapore-based trader.

The latest sell-off came after Berau’s 84.7% shareholder Asia Resource Minerals (ARMS) said on October 29 that a 23.8% stake held by former chairman Samin Tan had been transferred to Raiffeisen Bank International. The shares in London-listed ARMS, formerly known as Bumi PLC, had been pledged as security for a loan.

Since Berau’s attempt to issue new bonds to refinance the 2015 failed in mid-August, after receiving orders for only around 50% of the deal, its bondholders had been expecting the company to soon come up with a new refinancing plan. But the coal miner had delayed the launch of the refinancing multiple times, investors said.

ARMS said in a statement on November 12 that the share transfer to Raiffeisen Bank “has changed potential options available to the company for refinancing, and the board will update the market in due course”.

Moody’s downgraded Berau to B3 on November 6, while Standard & Poor’s cut it to CCC+ a day later, citing the refinancing risk on the 2015 bonds.

 

Dim recovery prospects

One Berau bondholder has calculated a recovery rate of 45%, assuming a 60% haircut, a maturity extension for both the 2015s and 2017s to 2020, and a US$50m upfront cash payment out of its cash-and-accounts-management agreement (CAMA) account, which holds US$100m to serve interest payments.

Investors are pinning their hopes on a disciplined and transparent process.

“The board seems careful in the last couple of years due to its (ARMS’s) London listing status. It’s hard to imagine the company will use up cash irresponsibly,” the Singapore-based trader said.

Macgregor agreed. “The new management (Amir Sambodo and Bob Kamandanu) seem to be more transparent than prior management and are likely to work proactively with creditors,” he said.

Sambodo is president commissioner of Berau and Kamandanu is a board member for Berau and CEO of ARMS. They took over in a July reshuffle after ARMS split from Indonesia’s Bakrie family.

 

Depressing outlook

Bondholders hoping for a white knight to buy the coal assets from Berau are likely to be disappointed.

“Berau’s coal assets have negative equity. It’s very hard to find a buyer for those assets in this environment,” the source said.

“The operating environment for the Indonesian coal industry is worse than it was in 2008,” said Viktor Hjort, Hong Kong-based head of Asia fixed-income research at Morgan Stanley. “It has excess capacity and a lack of pricing power. It doesn’t help that China is reforming and needs less coal than before.”

Indeed, Indonesian coal prices have been decreasing since the start of the year. The HBA index, the Indonesian government’s monthly benchmark for coal prices, has fallen for six months straight to US$65.7/ton, the lowest since 2009, due to continuing oversupply and weaker-than-expected demand from China and India, according to an analyst for the Indonesian coal sector at a Singapore-based coal trading house.

To make matters worse, purchasing contracts with Indonesian coal miners are getting shorter as coal prices have fallen. As a result, offtake prices tend to be lower after every renewal, said Scott Dendy, editor at IHS Coal, Asia Pacific, a research firm and consultancy specialising in the coal sector.

Dendy said coal prices were unlikely to go up in the near future, and some market participants have even written off next year for a rebound.

As for the Indonesian coal miners, analysts say more bankruptcies in the sector are likely, and only the ones with low production costs and strong liquidity can survive.

“For the next 12 months I see credit profile continuing to deteriorate in the sector as cash burn accelerates further,” said Ray Jian, London-based analyst at Pioneer Investments Global Asset Management.

A Berau spokesperson declined to comment.