MARC Ratings revises Guan Chong, JB Cocoa rating outlook to negative

KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC Ratings) has revised its rating outlook on the sukuk programmes of Guan Chong Bhd (AA-IS) and JB Cocoa Sdn Bhd (A+IS), to negative from stable.

“The rating action is driven by the prevailing abnormal price environment for cocoa beans, having risen steeply from US$3,835 per tonne to US$9,193 per tonne between end-October 2023 and end-March 2024, that has weighed sharply on the working capital requirement of Guan Chong and JB Cocoa,” it said in a statement.

This could lead to a sharp increase in their borrowing levels, with leverage positions potentially increasing to above 1.5x, it added.

The rating agency noted that the recent adverse weather conditions, exacerbated by the El Niño effect, have severely impacted cocoa bean production, particularly in key cocoa-producing countries, Côte d’Ivoire and Ghana, which account for 60% of global production.

“MARC Ratings understands that Guan Chong and JB Cocoa are procuring beans from other countries in West Africa, Ecuador and Indonesia to be able to fulfil their supply contracts with minimal impact on their operations and cash flow generation as of date. They have also put in place mitigation plans to shore up their financial position including strengthening their balance sheets,” it said.

“Notwithstanding these initiatives, the rating agency remains concerned about the impact on the credit profile of the cocoa grinders from a prolonged supply-demand dislocation due to the high cocoa bean price environment. MARC Ratings will undertake a full assessment on both issuers in the next few months,” it added.

After completing the rating reviews, any rating action will evaluate the effectiveness of measures in place to address current challenges.

The rating outlook could be revised back to stable if the impact on credit profiles from the change in cocoa industry dynamics is well mitigated.