KUALA LUMPUR: Standard & Poor's Ratings Services revised its outlook on IOI Corp Bhd
to negative from stable on concerns about the impact of the sharp fall in crude palm oil (CPO) prices on the earnings and cashflow.
The ratings agency said on Tuesday it affirmed its “BBB” long-term corporate credit rating on the palm oil producer.
S&P lowered its Asean scale rating on IOI to "axA-' from 'axA'. It also affirmed its 'BBB' long-term issue ratings on various notes that IOI guarantees.
S&P credit analyst Vishal Kulkarni said he had revised the outlook to reflect our view that IOI Corp's EBITDA and cash flows were likely to be weaker than earlier expected over next 12 months because of a recent sharp decline in CPO prices.
"At the same time, IOI's reported debt will increase following the depreciation of the ringgit. The company's distribution of the majority of its operating cash flows to shareholders limits its deleveraging potential,” he said.
Kulkarni projected that IOI Corp's ratio of debt to earnings before interest, taxation, depreciation and EBITDA would deteriorate to more than 3.5 times for fiscal 2016 (the year ending June 30, 2016).
This was based on the assumption the ringgit will stay at about 4.2 per US dollar and CPO prices would remain subdued for the rest of the fiscal year. We had earlier expected the debt-to-EBITDA ratio to be 2.8 times to 3.0 times, compared with its downgrade trigger of 3.0 times or more.
“The negative outlook reflects our view that IOI's debt-to-EBITDA ratio may not recover to close to 3.0 times over the next six to 12 months if CPO prices remain at current levels and the company's shareholder distributions stay elevated.
“We estimate that IOI's EBITDA will be RM1.50bil to RM1.60bil in fiscal 2016, based on our average CPO price assumption of RM2,100 per ton. IOI's EBITDA for fiscal 2015 was RM1.73bil,” it said.
"A depreciation of about 20% in the ringgit over the past six months has amplified the impact of weaker CPO prices on IOI's financial strength," said Kulkarni.
About 90% of the company's debt is denominated primarily in US dollar, Japanese yen, and euro.
Assuming that IOI refinances all its maturing debt as of June 30, 2015, he estimated that the company's reported debt could increase by RM700mil to RM800mil to about RM7.50bil by June 30, 2016, if the ringgit remains around 4.2 per US dollar.
That compares with reported debt of MYR6,648 million as of June 30,
2015.
S&P Ratings said in its base case, IOI Corp's shareholder distribution of RM550mil to RM600mil and capital expenditure of RM350mil-RM400mil per year over the next two years would use up 80%-90% of the company's operating cash flows.
It pointed out that a recovery in IOI's financial ratios could therefore be slow, leaving the company dependent on an improvement in CPO prices to deleverage.
S&P Ratings said it had affirmed the rating because IOI continued to benefit from its low cost of production and better margins in the upstream business than the industry average.
It continued to assess the company's business risk profile to be "satisfactory."
The ratings agency said it could lower the rating if (1) IOI's cash flows from plantations do not improve meaningfully; (2) the company's shareholder distribution stays sizeable; or (3) a weak ringgit continues to weigh on the company's debt. The debt-to-EBITDA ratio failing to recover below 3.0 times sustainably would indicate a weakened financial risk profile.
However, it could revise the outlook to stable if: (1) it expects CPO prices to rebound materially and sustainably; (2) the ringgit appreciates; or (3) IOI adopts conservative financial policies such that its debt-to-EBITDA ratio is consistently below 3.0 times.
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