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03 Aug 2005
MOODY'S AFFIRMS A3 RATING FOR IOI CORP BERHAD; OUTLOOK STABLE
Hong Kong, August 03, 2005 -- Moody's Investors Service has affirmed its A3 senior unsecured rating
for the US$500 million bond issued by IOI Ventures (L) Berhad and
guaranteed by IOI Corporation Berhad (IOI). The rating outlook
This affirmation is in response to IOI's announcement of the privatization
of IOI Oleochemical Industries Bhd (IOI Oleo), currently 63%-owned
by IOI and 5% by IOI Properties Berhad (IOI Prop), in turn
a 67% subsidiary of IOI. Upon completion of the privatization,
IOI Oleo will become a wholly-owned subsidiary of IOI.
Moody's says the exercise is in line with the rating agency's understanding
that IOI regards IOI Oleo as its core asset and seeks to raise its ownership
stake over time. Furthermore, the proposed privatization
will streamline the group's palm oil business and better integrate
its upstream and downstream operations. Total consideration for
the privatization is around RM872 million, which will be funded
by internal reserves, comprising operating cash flow and bond proceeds
raised earlier this year.
Moody's does not expect additional indebtedness as a result of this
privatization and thus its impact on the company's financial profile
will be immaterial. While internal cash reserve of IOI will be
lowered post-privatization, we expect it to maintain its
minimum cash holding policy of RM500-600 million at the group level
and RM200-300 million at the company level for liquidity.
We draw additional comfort from the company's ability to get access
to the domestic bank and capital markets.
At the same time, the A3 rating continues to reflect the key credit
strengths of IOI: (1) the competitive advantages offered by its
leading position as a well-managed and low-cost CPO producer,
(2) its diversification into the downstream business creates a vertically
integrated operation and helps counter CPO price volatility, (3)
the favorable state of demand for palm oil, which supports IOI's
business fundamentals, (4) its experienced management team and track
record in managing the company through the cycles, and (5) its sound
financial standing, which exhibits positive free cash flow generation
and a well-managed debt maturity profile.
Furthermore, the A3 rating reflects the following key credit challenges:
(1) the commodity nature of CPO with average historical prices in decline
over the last 10 years and subject to cyclical trends, (2) the cyclicality
of the property business, although this situation is partially mitigated
by IOI's township focus and track record for sustaining sales, (3)
the company's historical record for growing via acquisitions with potential
future investments/acquisitions creating uncertainty for its business
and financial profiles, (4) its strategy of managing return on equity
(ROE) through dividend and share buybacks, and (5) its relatively
weak back-up liquidity arrangements.
Upward rating pressure could evolve over time if IOI demonstrates its
ability to continue sustaining operating profits and margins over the
CPO price cycle, and maintains its financial prudence, while
pursing its growth strategy, such that EBITDA/gross interest exceeds
12x and TD/EBITDA averages below 1.5x across the cycle.
Downward rating pressure could emerge if (i) CPO prices decline and their
impact is not adequately offset by IOI's downstream operations or de-leveraging
strategy, or (ii) aggressive acquisitions occur, but which
do not generate satisfactory returns and raise the company's overall risk
profile, such that EBITDA/gross interest drops below 7x and TD/EBITDA
exceeds 3x. Downward rating pressure could also result if IOI reduces
its management influence or shareholding interest in IOI Prop to below
IOI Corporation Berhad, headquartered in Malaysia and listed on
Bursa Securities Malaysia, is engaged in oil palm plantations and
resource-based manufacturing, including oleochemical and
specialty oils and fats. It is also one of the largest property
development and investment groups in Malaysia.
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
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