KUALA LUMPUR: Moody's Investors Service revised downwards the outlook on Sime Darby Plantation Bhd (SDP) from stable to negative on concerns that its credit metrics would remain weak over the next six to 12 months.
The rating agency said on Wednesday it affirmed the (P)Baa1 rating on the US$1.5bil senior unsecured medium-term note programme of its unit, Sime Darby Global Bhd, and the Baa1 backed senior unsecured debt rating on the sukuk issued by Sime Darby Global.
“At the same time, Moody's has revised the outlook on these ratings to negative from stable, ” it said.
In its ratings rationale, it said the change in SDP's ratings outlook to negative reflected its expectation that “its credit metrics would remain weak for its Baa1 ratings over the next six to 12 months, despite its planned RM1bil debt reduction from asset sale proceeds this year”, Maisam Hasnain, a Moody's assistant vice president and analyst said.
Following SDP's weak operating results for the quarter ended June 2019, its adjusted leverage -- as measured by Moody's-adjusted debt/EBITDA -- increased to around five times as of June 30,2019 from around four times as of March 31, 2019.
"While the soft 2Q 2019 results were primarily driven by weaker palm oil prices, the lower earnings and increase in debt mean that despite its planned RM1bil debt reduction, SDP's adjusted leverage will only decline to around four times by the end of 2019," Hasnain added.
“This level of leverage exceeds our previous estimate of 3.3 times and will continue to exceed the 3.5 times downward rating trigger for its Baa1 ratings.
"Furthermore, given SDP's elevated leverage, any delays in executing its asset monetisation plans or the use of proceeds for purposes other than debt reduction would likely result in a negative rating action.
SDP's Baa1 ratings continue to reflect (1) its position as the largest listed palm oil plantation company by plantation area, and as the largest global producer of certified sustainable palm oil, and (2) its integrated operations spanning across the palm oil value chain.
Moody's expects SDP's liquidity profile will remain weak, as its cash sources will be insufficient to meet scheduled debt maturities, capital spending and dividends over the next 12 months.
SDP's scheduled debt maturities include US$760mil in term loans with a bullet maturity in June 2020.
However, Moody's expects SDP to proactively refinance these maturities in the coming months.
SDP's refinancing risk is partially offset by its strong access to funding from domestic and international banks, particularly due to its government of Malaysia-linked shareholders -- Permodalan Nasional Bhd (PNB) and Malaysia's Employees Provident Fund.
The rating also considers SDP's exposure to environmental, social and governance (ESG) risks.