Golden Agri remained susceptible to the volatility of CPO prices and the more challenging operating landscape in the republic.
KUALA LUMPUR: RAM Ratings Services has downgraded the rating of the RM5bil debt notes issued by Indonesia’s largest oil palm plantation company Golden Agri-Resources Ltd unit.
The ratings agency said on Wednesday the rating for Golden Assets International Finance Ltd’s IMTN programme of up to RM5bil (2012/2027) was lowered from AA3(s) to A1(s).
RAM Ratings also retained the negative outlook on the rating. Golden Assets is a funding conduit owned by GAR.
“The downgrade is premised on the continued deterioration of Golden Agri’s credit metrics as a result of softer crude palm oil (CPO) prices and elevated debt levels,” it said.
CPO prices fell 24% on-year in 2015, reaching multi-year lows in September, due to concerns over a demand slowdown, an ample supply of vegetable oils and high stock levels.
RAM Ratings said these prices were below those which it and Golden Agri had projected.
The ratings agency noted the group’s debt levels have stayed high, standing at US$3.33bil as at end-September 2015.
This was due to intensive leveraging in the past to fund upstream and downstream expansion as well as related working-capital needs.
Weaker CPO prices and hefty debts have strained Golden Agri’s credit metrics to levels far below the threshold for an AA3 rating. Its funds from operations debt cover (FFODC) after adjusting for readily marketable inventories (RMI) deteriorated to 0.10 times for the nine months FY December 2015 (annualised).
“GAR’s capex and debt level should moderate going forward, given that the expansion of its refineries has been completed.
“Nevertheless, still-soft CPO prices are expected to constrain cashflow generation, while meaningful returns have yet to materialise from its enlarged refining operations (amid industry overcapacity) and long-term investments,” it said.
Golden Agri’s RMI-adjusted FFODC could hover at around 0.12-0.14 times under our sensitised scenario (including cash and money-market instruments: 0.16-0.19 times).
Golden Agri remained susceptible to the volatility of CPO prices and the more challenging operating landscape in the republic. The rating is also moderated by the Group’s history of debt rescheduling.
“The negative outlook on the issue rating reflects our concerns over GAR’s weak debt coverage levels, which could remain low should CPO prices stay bearish at multi-year low levels.
“The rating could be downgraded if the group’s FFODC stays below 0.15 times amid a prolonged period of weak CPO prices and/or an unexpected rise in debt levels.
“Conversely, the outlook could be revised to stable in the event FFODC is sustained at above 0.15 times on the back of increased cashflow generation from the Group’s enlarged operations, if debt reduces significantly and/or CPO prices chart a strong recovery.
RAM Ratings said the Group remains the largest oil-palm plantation company in Indonesia, and the 2nd largest globally, backed by a planted area of 484,221 hectares.
Golden Agri’s operations are vertically integrated, with an expanded refining capacity of 4.7 million tonnes.
With its strong plantation management, Golden Agri has a favourable yield track record, with CPO yields of 4.8-5.3 MT/mature ha, which stack up well against yields of large, regional peers.
Nevertheless, strong El Nino weather conditions may crimp productivity this year, with CPO yield estimated to moderate to 4.7 MT/mature ha. The Group keeps a relatively low cost structure, providing good buffers against price downcycles.
Golden Agri is principally involved in the cultivation of oil palm, milling and refining operations in Indonesia, and downstream operations in China.
Through a Deed of Covenant, Golden Agri irrevocably and unconditionally provides an undertaking to the Trustee, for the benefit of the IMTN holders, to fulfil its obligations to Golden Assets to meet principal and profit payments or any amount falling due under the facility.
As such, the rating of the IMTN Programme reflects Golden Agri’s credit risk.
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