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Rating Action:

Moody's affirms Golden Agri's Ba2 rating; stable outlook

12 Dec 2014

Singapore, December 12, 2014 -- Moody's Investors Service has affirmed the Ba2 Corporate Family Rating (CFR) of Golden Agri-Resources Ltd (GAR) with a stable outlook.

RATINGS RATIONALE

GAR's stable outlook embodies its long track record of managing and expanding its plantation operations and the continuing growth of downstream activities as it creates an integrated palm oil business in order to fully exploit the value chain.

The stable outlook expects minimal further deterioration in Golden Agri's credit metrics on the basis that capital expenditure can be cut back in 2015 and that regional crude palm oil (CPO) prices average at least MYR2,240/tonne or around USD720/tonne (CIF NW Europe). While Moody's says that GAR can maintain a stable rating under these forward-looking assumptions, further deterioration of financial ratios would start to put pressure on the rating. This would include EBITDA/Interest falling below 4.0-4.5x or retained cash flow (RCF) to net debt declining below 13%, as well as adjusted debt to EBITDA surpassing 4.0-4.5x on a sustained basis. Moody's expects the last ratio to be above this range at year-end 2014, while it expects the first two metrics to be maintained.

"In the last twelve month period to the end of September 2014, Golden-Agri's adjusted debt/EBITDA has climbed to 4.8x from 3.9x. While Golden Agri is necessarily carrying more debt to support its downstream and merchandising operations, weak refining margins, losses in its Chinese oilseed crushing business during 2014 and weaker CPO prices, notwithstanding a bouyant Q1, have seen reported EBITDA margins decline from 10.5% in Q1 2014 to 5.4% in Q3 2014, compared with an EBITDA margin of 10.1% for 2013," notes Alan Greene, a Moody's Vice President - Senior Credit Officer.

Golden Agri's chief source of cash generation is derived from the margin it makes from its palm oil plantations. With a total mature area of 441,000 hectares, including 96,000 hectares of plasma farms, Golden Agri is the largest plantation company in Indonesia producing 2.46 million tonnes (mt) of CPO in the 12 months ended September 2014. However, its EBITDA unavoidably reflects the selling price of CPO and the resultant margin it makes from its nucleus palm oil plantation estate and on purchases of fresh fruit bunches from its plasma famers.

Golden Agri has successfully expanded its downstream refining capacity in Indonesia and is able to sustain high utilisation rates thanks in large part to the availability of CPO from its own plantations. Nevertheless, investment in palm oil refineries has boomed since the changes in Indonesia's export tax regime in 2011. There is now a surplus of refining capacity in Indonesia and while some operations may be inefficient and underutilised, the price spread between palm oil and olein has been tight leading to thin refining margins. GAR is not a major player in oleochemicals and only its branded refined products such as cooking oil, which enjoy a large market share in Indonesia, serve to protect some of its margin.

Merchandising is the other area of focus of Golden Agri where the company trades palm oil and its various products, supported by a necessary storage and logistics infrastructure. The growth of this activity is seen in the increase in revenue but with a commensurate fall in margin. At the same time, trading results in a greater use of trade financing which adds to the overall short-term debt burden of Golden Agri.

Golden Agri's short-term debt was USD1.02 billion at the end of September compared to USD1.06 billion at the end of 2013, although much of this is in the form of trade finance lines which are regularly rolled-over and self liquidate with trade receivables and inventories. Over the same period inventory had increased to USD838 million from USD772 million. Its reported long-term debt of USD1.87 billion as of September 2014 has a good maturity profile with little more than USD100 million maturing in 2015 and the bulk, approximately USD1.2 billion falling due in 2017. However, Golden Agri's USD400 million 2107 convertible bond could be put in October 2015 as today's SGD0.46 share price is well under the SGD0.87 conversion price. Moody's expects GAR to put in place a refinancing plan for this scenario well ahead of the possible put date.

In 2015, Moody's expects palm oil prices to average MYR2,240/t which equates to about USD720/t on a CIF Rotterdam basis. This compares to broader market expectations of USD750/t to USD800/t. Assuming better weather and an increase in mature area, Golden Agri's CPO output could increase by 5% or more in 2015. Moody's expects Golden Agri to generate between USD500 million and USD600 million of funds from operations in 2015 but accompanied by a sharp cutback in capex in 2015, compared to the USD519 million spent in 2013, and with the final figure closer to the USD284 million spent in the first nine months of 2014. Some of the capex will be spent on completing the refinery expansion and on constructing a biodiesel plant, with the remainder supporting estate growth. Moody's notes that the interim dividend payment for 2014, of around USD40 million, has been pushed into 2015 and, based on the dividend policy of a 30% payout, we expect a final dividend payment of around USD20 million. The remaining cash flow is likely to support working capital swings when CPO prices recover.

"Current pricing pressures in the palm oil industry look set to persist for a while longer. Although the rate of growth of oil palm output has eased since September, palm oil stocks in Malaysia for example increased in November while the average price so far in Q4 is around MYR2,190/t," adds Greene who is Lead Analyst for Golden Agri-Resources.

Notwithstanding current difficulties, the future prospects remain good. Palm oil's status as the vegetable oil with the lowest cost of production and implementation of biodiesel mandates by Malaysia and Indonesia should result in a long-term underpinning of the palm oil price in those countries although vegetable oil prices will continue to swing depending on the global supply and demand of annual oilseed crops. GAR is a market leader in palm oil plantations and a key player in the refining and downstream sectors but it has not yet cemented its ability to influence margins in the overall palm oil chain.

The rating may experience downward pressure if (1) evidence emerges of cash leaking from Golden Agri to fund affiliated companies - for example, through inter-company loans, aggressive cash dividends, or investments in affiliates; (2) unexpected costs associated with the expansion of plantations and processing facilities arise; or (3) CPO prices decline consistently beyond our expectations and 4) access to trade finance is impaired. Financial metrics indicative of significant deterioration would include 1) EBITDA/Interest falls below 4.0-4.5x or 2) RCF/Net Debt declines below 13% to 15% and 3) Adjusted Debt/EBITDA surpasses 4.0-4.5x all on a sustained basis.

The principal methodology used in this rating was Global Protein and Agriculture Industry published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Golden Agri, registered in Mauritius, is the largest listed oil palm plantation company in Indonesia. Listed on the Singapore Stock Exchange in 1999, it mainly operates in Indonesia and China and is 49.95% owned by the Widjaja family.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Greene
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms Golden Agri's Ba2 rating; stable outlook
No Related Data.
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