B

erau Coal Energy (BCE) defaulted on its US$450 million 12.5 percent senior secured notes due 2015, issued by Berau Capital Resources Pte. Ltd. (BCR) and guaranteed by BCE, when it failed make its principal payment at maturity on July 8, international rating agency Moody'€™s said.

Prior to default, the Singapore High Court imposed a moratorium on the 2015 notes, giving the company until Jan 4 to negotiate with noteholders.

On July 1, Asia Coal Energy Ventures Limited (ACE), funded by Indonesia-based Sinarmas Group, announced an unconditional cash offer to acquire 100 percent of the outstanding shares of BCE'€™s 84.7 percent owner, Asia Resource Minerals (ARMS).

The takeover is in the final stages of completion following acceptance from approximately 68.2 percent of ARMS'€™ shareholders, including Nathaniel Rothschild'€™s NR Holdings, which had proposed an initial competing equity offer for BCE.

ACE then announced terms of a proposed notes restructuring in its draft restructuring support agreement. Under the proposed transaction, BCE will pay a portion of the notes principal using $100 million of new equity proceeds raised at ARMS '€” and down-streamed to BCE as a shareholder loan '€” and $18.75 million of cash-on-hand. The unpaid portion of the $450 million notes due July 8 and $500 million notes due 13 March 2017, issued by BCE, would then be exchanged for new notes maturing on July 31 2019 and Dec, 31 2020 respectively. The proposed restructuring also aims to reduce the coupon on the new notes, comprising both a cash and paid-in-kind component.

'€œEven with the moratorium in place, BCE is exposed to potential lender claims in Indonesia until it remedies its default with the expected note exchange detailed in the draft restructuring support agreement,'€ says Brian Grieser, a Moody'€™s vice president and senior analyst.

'€œThe proposed restructuring of the 2015 and 2017 notes, when completed, will be positive for BCE in that it lowers the cash coupon payment and significantly improves the company'€™s maturity profile as its next material maturity will be pushed to 2019,'€ adds Grieser, who is also lead analyst for BCE.

Should the proposed terms be agreed to by noteholders, the ratings would likely be stabilized or potentially upgraded post-transaction, assuming no further deterioration on BCE'€™s overall credit profile. The negative outlook also reflects the lack of clarity around ACE'€™s corporate strategy once the takeover is completed and its financial and corporate governance policies at BCE, which has been plagued by weak governance over the past few years.

In May, Moody'€™s downgraded the corporate family rating of BCE to Caa2 from Caa1 as well as the ratings on senior secured bonds issued by BCE and Berau Capital Resources Pte. Ltd. to Caa2 from Caa1, with negative outlook. Ratings are unlikely to be upgraded prior to successful completion of the restructuring.