OREANDA-NEWS. Fitch Ratings says that there is no immediate impact on Indonesia-based PT Indika Energy Tbk's (Indika, B/Negative) ratings from its offer to buy back up to USD100m of principal value of the USD300m notes due 2018. However, the company's credit profile continues to remain under pressure due to the poor market outlook for thermal coal and resultant weak cash generation, and its substantial indebtedness.

The indicative offer price for the notes, which are issued by Indo Energy Finance B.V and guaranteed by Indika, is below par. However, acceptance of the offer is not contingent upon a minimum acceptance level by bondholders, nor does the offer contain any changes to covenants.

Fitch deems the cash tender for the notes to be opportunistic. While Indika faces medium-term refinancing challenges with its notes due in 2018 (USD300m) and 2023 (USD500m), the tender offer only addresses around 10% of its total debt at the Indika level. In addition, its liquidity is still adequate to service its debt-related obligations in the next 18 to 24 months. However, we still believe that Indika needs to address its capital structure in a more significant way, given our expectation of weak coal prices in the short- to medium-term.

Fitch estimates that the proposed buyback could lower Indika's net debt by around 5%, and marginally reduce its interest costs. Fitch expects Indika's interest coverage to be around 1x in 2016 and 2017 (1.7x in 2014); where interest coverage is the ratio of EBITDA minus taxes, of the company at a standalone level and its fully owned subsidiaries plus dividend inflows from all its non-fully owned subsidiaries and associate companies, to the interest expense of the holding company and fully owned subsidiaries.

For Indika, dividends received from its 46%-owned coal miner PT Kideco Jaya Agung (Kideco) form around 70% of cash inflows on a standalone level. Kideco's 9M15 EBITDA was down 8% yoy, but higher than our expectation due to better cost control. Kideco's cash cost (ex-royalty) per unit declined 18% yoy in 9M15, partly offsetting the decline in price realisation. Fitch believes that coal prices are unlikely to rebound in the near term on weak demand; further cost deflation is difficult to achieve. We also expect coal production to remain marginally lower in 2016 compared to 2015.

Weak coal market fundamentals have also impacted 9M15 financial performance at Indika's two main subsidiaries - Petrosea (70% owned) and MBSS (51% owned) - that are engaged in coal mining services and coal transportation and logistics respectively. EBITDA for both Petrosea and MBSS was down around 40% yoy in 9M15, and we do not expect a meaningful recovery in the near term. As a result, dividend contribution from Petrosea and MBSS to Indika would cease to be significant from 2016, in our view.

Liquidity is now the key driver of India's ratings. The company had USD217.5m of unrestricted cash and cash equivalents and USD15.5m of restricted cash at the Indika level at end-September 2015; this amount will reduce following the cash tender offer, but we expect Indika to use bank debt facilities to fund a portion of the tender offer. Also, the company has a sizeable amount of committed undrawn bank facilities; we understand the company is negotiating the rollover of limits due in the near term. We also expect the company to monetise some property to reduce total indebtedness and to maintain its liquidity at an adequate level.