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Indocoal Exports Presale Report (Cayman) Limited - Series 2005-1

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Indocoal Exports Presale Report (Cayman) Limited - Series 2005-1 Structured Finance Future Flow/Indonesia IndoCoal Exports Presale Report (Cayman) Limited - Series 2005-1 Expected Rating* Summary Amount Final Note Fitch has assigned an expected rating to the Series 2005-1 notes Class (m) Maturity Rating Type (“the notes”) to be issued by IndoCoal Exports (Cayman) Limited A USD[600] [July 2012] BBB- Fixed (“the issuer”) as indicated at left. The expected rating addresses the Analysts likelihood that cash flows generated by the assigned receivables will Hilary Tan, Hong Kong be sufficient to ensure timely payment of interest and principal on +852 2263 9904 the notes over the life of the transaction. [email protected] The transaction is a structured export note backed by receivables Charles Chang, Hong Kong (both existing and future) generated from the businesses of PT +852 2263 9919 Kaltim Prima Coal (“KPC”) and PT Arutmin Indonesia (“Arutmin”) [email protected] (together, “the seller parties”). The seller parties, who are leading coal producers, jointly accounted for approximately 29% of Ben McCarthy, Hong Kong Indonesian coal production in 2004. The seller parties are both +852 2263 9922 subsidiaries of PT Bumi Resources Tbk (“Bumi”) and each operates [email protected] under a Coal Contracts of Work (“CCOW”) granted by the Gregory Kabance, Chicago government of Indonesia. +1 312 368 2052 [email protected] As a future flow transaction, the transaction relies on the ongoing production and export sale of coal even in the event of the John Dell, Chicago bankruptcy or insolvency of either or both of the seller parties. Fitch +1 312 368 3161 assessed the transaction’s ability to withstand an investment-grade [email protected] stress using its going concern assessment (“GCA”), complemented by the incorporation of various structural features. The rating of the Michael Hermans, Brisbane transaction is capped by the GCA of the combined entity. Any +61 7 3222 8615 deterioration in the credit quality of KPC or Arutmin may affect the [email protected] GCA and, by extension, the rating of the notes. The ‘BBB-(BBB minus)’ expected rating exceeds the ‘BB-(BB minus)’ Long-term Sovereign Analyst sovereign rating of the Republic of Indonesia. Ai Ling Ngiam, Hong Kong +852 2263 99193 Fitch’s GCA can be broadly described as an indication of an entity’s [email protected] ability to continue its operations in a particular line of business as a * Expected ratings do not reflect final ratings going concern, despite financial difficulties. For the purposes of this and are based on information provided to report, KPC and Arutmin will be treated as a single entity since the Fitch as of May 2005. Final ratings are notes are supported by all the receivables generated by these two contingent on final documents conforming to companies. information already received as well as the provision of satisfactory legal opinions. Strengths Ratings are not a recommendation to buy, sell Front-loaded amortisation schedule: The amortisation schedule or hold any security. for the notes is front-loaded to take advantage of strong demand and price environment for coal in the global market in the short to medium term. This structure mitigates the risk of greater uncertainty surrounding prices in the longer term; it also substantially mitigates refinancing risk. Substantial coal reserves and strong demand for coal: The sellers have sufficient reserves to meet planned production over the life of the transaction, with a combined 959mt of proved and probable marketable reserves as of 31 March 2005. In Fitch’s view, coal prices and coal demand in the Asia Pacific region are likely to remain robust over the medium term, driven by healthy economic growth, by the strength of oil and gas prices and by the rising number of coal-fired power plants in the region. 2 June 2005 www.fitchratings.com Structured Finance Structure Diagram Completion of Transfer of CCOW upon the Occurrence of Certain Triggers PT Arutmin PT Kaltim Prima Indonesia Coal Sale of PT Indocoal PT Indocoal Sale of Coal Receivables Kaltim Resources Kalsel Resources IndoCoal Obligors Resources Sale of Coal (Cayman) Limited Sale of Issue of Receivables Sale of Receivables 2005-1 (After the Occurrence of Notes IndoCoal Exports CCOW Transfers) Investors (Cayman) Limited Grant of Security Sale of Coal Over all Issuer's Assets (After the Occurrence (Including Receivables) of CCOW Transfers) The Bank of New York as Security Trustee Source: Transaction documents, Fitch • Reserve account: a reserve account will be set • Diversified Operator Risk: KPC and Arutmin up at closing, funded to the equivalent of three contracts with four major contractors for its coal months’ interest and principal payments. Within production, while KPC carries out its own six months after closing, the reserve account is mining operations. The diversification of required to be funded with up to six months of relationship among several production interest and principal. contractors mitigates event risks specific to certain contractors. • Transaction cash flows held in collection accounts: All the underlying obligors for the • Transaction monitoring by the transaction transferred export receivables will be given notice administrator: The transaction administrator, and instructions to make their payments directly an independent third party appointed by the into collection accounts in New York. All indenture trustee, will provide auditing services disbursements from these accounts will be subject to ensure compliance with the transaction to verification by the transaction administrator. documents. The duties of the transaction This arrangement mitigates the risk of a diversion administrator include: comparing payments to of cash flows by any transaction parties as well as marketing agents and contractors against any commingling risk in the event of their invoices; verifying the cash flow waterfall; and bankruptcy. obtaining consents from new marketing agents or contractors, if any, who are to be paid on a • No other creditors: The seller parties covenant priority basis in accordance with the transaction not to incur additional debt (contingent documents. obligations, lease obligations or others) during the term of the transaction with the exception of • Strong transaction cash flows: Fitch’s cash flow obligations to trade creditors, payable within 180 analysis incorporates several stresses, including days of their incurrence, and obligations under price and volume stresses, under which the operating leases to finance capital expenditures. transaction is still capable of covering debt The issuer is prohibited from incurring any service. additional debt under the structured export note programme where such issuance would trigger an • Early amortisation triggers protect investors early amortisation event and would cause Fitch from deteriorating performance: The to withdraw its rating or downgrade the rating of transaction incorporates multiple early the notes below the lower of the then-current amortisation triggers that will serve as early rating and the ‘BBB-(BBB minus)’ expected warning mechanisms if the transaction deviates rating assigned. substantially from expectations at closing. The IndoCoal Exports (Cayman) Limited - Series 2005-1: June 2005 2 Structured Finance triggers monitor the excess cash flows available, notify the government. Furthermore, the the amount of eligible receivables and production economic incentives for the government to targets, among others. interfere are limited in Fitch’s view. (For further description, see Sovereign Risk section). Concerns • No notification to the government: The • Uninterrupted services by contractors and government will only be notified of the transfer marketing agents: Pursuant to the relevant of the CCOWs on the occurrence of certain security deeds, the seller parties will assign their trigger events, but not prior to transaction rights under marketing services agreements and closing. The risk of sovereign interference in the production contractor agreements such that the transaction, which is inherent to future flow marketing agents and production contractors can transactions, takes the form of transfer and continue to perform their duties, as stipulated in convertibility risks, nationalisation or these agreements, in the event of the financial expropriation risks, and redirection or diversion distress of the seller parties. The marketing risks, in terms both of products and obligors. agents and the contractors will have the incentive to continue performing since they are • Bankruptcy of the seller parties: The compensated on the basis of their performance. bankruptcy or insolvency of KPC and/or See Stress Scenarios section. Arutmin could affect their ability to generate receivables and, ultimately, cash flows for the • Bengalon forecast development achievable: transaction. Fitch has examined the technical review performed by Minarco, which confirms that • “Greenfield” nature of the Bengalon mine: management’s forecasts about the timing and The Bengalon mine is a greenfield development the volume of production that the Bengalon that is expected to expand production at KPC mine will be able to deliver are achievable. substantially, producing approximately 10% of However, to be conservative, Fitch has analysed the seller parties’ total production volumes for in its stresses scenarios the impact of a one-year 2005, rising to approximately 27% in 2012. The delay in Bengalon’s
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