Moody’s places IOI Corp on review for downgrade

KUALA LUMPUR: IOI Corp’s bonds face the possibility of being downgraded by Moody's Investors Service due to uncertainty over the plantation heavyweight’s operating performance, particularly on its downstream business.

It said on Wednesday the agency  had placed on review for downgrade the Baa2 issuer rating, Baa2 senior unsecured bond rating of IOI Investment (L) Bhd, and Baa2 senior unsecured bank credit facility rating of IOI Ventures (L) Bhd.

The (P)Baa2 senior unsecured medium-term note (MTN) program rating of IOI Investment (L) Bhd has also been placed on review for downgrade.

A Moody's vice president and senior analyst Jacintha Poh said the review for downgrade was driven by uncertainty regarding IOI's operating performance, particularly on its downstream business, after its entire oil palm production was suspended by the Roundtable on Sustainable Palm Oil (RSPO).

She said another factor was the resultant announcement by several of its customers to cease cooperation with the company.

Since April 4, 2016, RSPO has suspended the certification for all of IOI's oil palm production after receiving complaints by a non-governmental organisation on non-compliance of IOI's Indonesia plantation with various RSPO principles and criteria and requirements.

The Indonesian operations account for about 2% of the company's annual crude palm oil (CPO) production.

Moody’s said Unilever PLC (A1 stable), Kellogg Company (Baa2 stable), Mars Inc (unrated), and Nestle S.A. (Aa2 stable) announced that they would not cooperate with IOI, with Unilever and Kellogg setting a period of three-months to implement an exit process.

IOI Corp has submitted an action plan to RSPO, which it believes will help resolve the complaints.

However, the time frame for the resolution remains uncertain and Moody's notes that some plantation companies have required more than a year to satisfy RSPO's complaints.

"While potential sales losses from IOI's inability to supply certified palm oil are not quantifiable at this point due to ongoing developments with RSPO and its customers, we note that the company's earnings could deteriorate significantly, which could in turn pressure its financial metrics, if the suspension is not resolved within a year," said Poh.

In such scenarios, Moody's expects IOI Corp's downstream business to be severely impacted, particularly for customers in Europe and the US, who might switch to other suppliers in order to comply with their policies on environmental sustainability.

As this is IOI's second suspension within a five-year timeframe, Moody's also expects IOI to suffer reputational damage, which may result in a further loss of customers.

Nonetheless, Moody's expects IOI's operating profit for its fiscal year ending 30 June 2016 (FY2016) to remain broadly stable, supported by an expectation that the company will benefit from a higher average CPO price in 2H FY2016 and the assumption that it had accumulated a sufficient amount of inventory before the suspension date to continue producing RSPO-certified products in 4Q FY2016 for its existing customers.

According to the Malaysian Palm Oil Board, the average CPO price was at RM2,413 per ton in 1Q 2016 as compared to an average of RM2,179 per ton recorded in 2H 2015.

Moody’s said the review will focus on IOI Corp's (1) measures to resolve its suspension by RSPO on a timely basis; (2) strategy to manage its business with the ability to retain its customers during the suspension period; (3) continued maintenance of a sizeable liquid assets base; and (4) pro-active refinancing of its short-term debt maturities.

“Moody's expects IOI's earnings and profitability will deteriorate, resulting in a weakening of its financial profile such that leverage will exceed its current ratings threshold of 4.0 times, if the suspension is not resolved swiftly,” it said

IOI Corp is involved in oil palm plantations and resource-based manufacturing, including oleo-chemicals, as well as specialty oils and fats. As of Dec 31, 2015, it had around 180,000 hectares of oil palm plantation.