Singapore, June 03, 2015 -- Moody's Investors Service has changed to negative from stable the
outlook for Golden Agri-Resources Ltd ("GAR").
At the same time, Moody's has affirmed GAR's Ba2 corporate
family rating.
RATINGS RATIONALE
The outlook change reflects the continued deterioration in GAR's
credit metrics, arising in turn from falling palm oil prices and
weak returns from its heavy investment in downstream activities.
Accordingly, leverage has risen, with debt/EBITDA rising to
5.7x for the financial year ended 31 December 2014 from 2.4x
in the year ended 31 December 2012.
At the same time, liquidity has tightened, with short-term
debt totaling $1.72 billion as of 31 March 2015, including
the likely put of its $400 million convertible bond on 4 October
2015. However, since March, GAR has issued SGD200 milllion
of notes due 2018.
"From being strongly positioned for its rating range in late 2012,
GAR's credit metrics have deteriorated steadily," says
Alan Greene, a Moody's Vice President and Senior Credit Officer.
"The global growth in edible oil supplies and particularly palm
oil has contributed to lower oil prices and thus lower plantation returns
for GAR, while excessive refining capacity challenges the near-term
profitability of its downstream investments," adds Greene.
GAR accounts for some 8% of Indonesia's total CPO output,
but that figure rises to 25% when measured in terms of the company's
overall traded volumes in palm oil products.
Moody's forecasts the crude palm oil (CPO) price to average MYR2,240
per tonne in 2015 and, year to date, it has averaged MYR2,215
compared with MYR2,409 for the whole of 2014. So far,
efforts to stoke demand for CPO by the major producers, Indonesia
and Malaysia, by accelerating the imposition of biodiesel blending,
have yet to drive the price of CPO sustainably higher.
At these price levels, GAR's upstream activities are still
profitable and can achieve cash profits of over $250 per tonne;
but, if it fails to take decisive action on capex, investments
and shareholder distributions -- and if its non-plantation
businesses underperform -- then leverage will keep rising.
GAR's downstream moves have involved the construction of refineries,
oleo-chemical plants, biodiesel conversion facilities and
associated logistics.
However, these investments have yet to yield meaningful returns
because other players have adopted similar strategies, resulting
in overcapacity in refining.
Moody's expects GAR's rate of investment in downstream facilities
to slow now that the required assets are largely in place. However,
the reported EBITDA margin for its downstream activities fell from $28/tonne
in FY2013 to $9/tonne in FY2014, it slightly improved to
$11/tonne in Q1 2015.
GAR continues to invest in upstream operations, undertaking modest
new planting equivalent to 2% to 3% of its existing area
each year. It has also acquired plantations in Indonesia and is
investing in Liberia.
"Based on our expectations, in the absence of a major recovery
in the price of CPO -- which is the key determinant of its EBITDA
-- or asset disposals, GAR will likely show a fourth
consecutive year of negative free cash flow and rising net debt in FY2015,"
says Greene, who is also Lead Analyst for GAR.
The negative outlook is based on Moody's expectation that GAR will find
it challenging to reverse the rise in leverage, unless CPO prices
recover significantly and/or it achieves better margins on its downstream
operations. It also reflects the company's tight liquidity
conditions.
The outlook is negative and so a rating upgrade is unlikely in the near
term. The outlook could return to stable if leverage and other
metrics show signs of recovery and GAR's debt maturity profile improves.
To achieve a stable outlook, we would expect EBIT/interest to rise
well above 4x, RCF/net debt emerging in the mid-teens per
cent, and debt/EBITDA falling firmly below 4.0x.
The rating may show downward pressure if (1) CPO prices fall consistently
below our expectations; (2) unexpected costs related to the expansion
of plantations and processing facilities arise; (3) significant cash
outflows into other long-term assets, aggressive shareholder
returns, or support for affiliates occur, and 4) access to
trade finance is impaired.
Metrics that could prompt a downgrade include 1) EBITA margins fall below
7.5%; 2) EBITA/interest falls below 4.0x;
or 3) RCF/net debt falls below 13%-15%; and
4) adjusted debt/EBITDA surpasses 4.0x to 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 50.35% 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
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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 changes Golden Agri-Resources' outlook to negative; affirms Ba2