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Rating Action:

Moody's confirms IOI ratings at Baa2; outlook stable

06 Nov 2014

Singapore, November 06, 2014 -- Moody's Investors Service has confirmed the issuer rating and senior unsecured bond ratings of IOI Corporation Berhad (IOI) at Baa2. The senior unsecured bonds are issued by IOI Investment (L) Berhad and IOI Ventures (L) Berhad, which are wholly owned subsidiaries of IOI. The rating confirmation concludes the review for downgrade that was initiated on 10th July 2014 and extended on 8th September 2014.

The outlook for the ratings is stable.

RATINGS RATIONALE

Moody's notes that the underlying long-term credit strength of the palm oil plantation sector remains sound and the integrated business model of IOI is one of the most effective in the industry. However, credit metrics have been stressed from time to time as management, which controls 46% of the equity, directs substantial distributions to shareholders, and these payouts have overlapped with other investment activity or weaker operating cash generation. Notwithstanding the scale and timing of the distributions, the company's underlying liquidity remains strong, with an extended debt maturity profile and with more than sufficient liquid funds to repay the remaining $476 million of notes due March 2015.

Based on IOI's latest audited financial results for the year ended 30 June 2014,financial metrics were at the weaker end of our parameters for the rating, with debt/EBITDA at 3.6x and retained cash flow to net debt at17.1%. This compares against expectations for the rating, of less than 3.0x-3.5x and above 20%, respectively. After considering the impact of the MYR763 million of interim dividend paid in July and having reviewed the company's cash generation ability under various crude palm oil (CPO) price scenarios, centred on a base case of MYR2,240/tonne, we believe that IOI will be able to maintain its financial metrics within our parameters for the rating, This is in the expectation that the aggregate of funds applied to investment and to reward shareholders, do not consistently outstrip the cash generated from operations resulting in accelerating leverage.

The underlying strength of the palm oil sector is derived from its position as the lowest cost vegetable oil to produce. This is important, as once planted and mature, the palm oil trees yield fruit for the next 15 to 25 years whereas the decision to grow oilseeds such as soybean, sunflower, rapeseed etc. is made on an annual basis.

"While vegetable oil overproduction will lead to lower prices, including that of CPO, at our base case CPO price of USD680/tonne (MYR2,240/tonne), palm oil growers are still making cash profits of over MYR900 per tonne", says Alan Greene, a Moody's Vice President -- Senior Credit Officer.

The CPO price is presently recovering from low levels in late August/early September 2014 and could rise further given that peak output in Malaysia seems to have occurred in August this year, instead of occurring in September and October as was the case in 2013. A reduced harvest coupled with the temporary imposition of zero tax on CPO exports should put downward pressure on palm oil stock levels. Furthermore, Malaysia is implementing its delayed nationwide biodiesel blending mandate by the end of the year, and at the higher level of 7%, rather than 5% originally proposed, and this is also supportive of higher CPO prices.

"IOI's plantations benefit from the company's focus on Malaysia where land rights and industry regulations are well established, and it has not chased opportunities in Africa or over-exposed itself to Indonesia," continues Greene, who is Lead Analyst for IOI.

Moody's notes that IOI's plantation output provides insufficient CPO to match its refinery capacity despite its acquisition of Unico-Desa in November 2013. However, Bumitama Agri Ltd., its 31.4%-owned Indonesian associate is fast increasing its CPO output as its plantations reach maturity.

A key strength of IOI are its Loders Crooklan and IOI Oleochemicals businesses which supply tailored products primarily to the food, and household and personal care industries, respectively. These value added products are less affected by movements in the CPO price. The two specialty manufacturers, combined with the group's large refining activity, constitute IOI's "Resource-Based Manufacturing" division and make IOI's overall EBITDA relatively less sensitive to CPO price movements.

The outlook is stable on the expectation that IOI will remain focused on its existing operations and maintain a strongly liquid balance sheet after considering disbursements to support its plans for plantation expansion, downstream capital expenditure and returns to shareholders.

Upward rating pressure is limited given its modest revenue base, but could emerge if IOI is (1) able to reduce its overall debt level through prepayment, or (2) reduce its dividend payout policy and retain a greater portion of its operating cash flow within the company.

Indicators that Moody's will consider for an upgrade include (1) an overall EBITDA margin of 17% or above, (2) EBITDA/interest exceeds 8.0x, (3) RCF/Net Debt holding at or above 25%, and (4) gross debt/EBITDA below 2.5x, all on a sustained basis. The leverage threshold is relatively high for the rating band but is compensated by IOI's significant cash holdings.

Downgrade pressure on IOI could emerge if (1) pressure on its downstream operation's margins results in protracted weakness in profitability, such that overall EBITDA margin falls below 13%; (2) weaker palm oil prices and declining yields result in a material reduction in the profitability of its plantation segment; (3) ownership of IOI Oleochemical Industries Bhd and Loders Croklaan Group BV declines to less than 50%, such that it loses management control; and/or (4) aggressive acquisitions fail to generate satisfactory and timely returns, and raise its overall risk profile.

Credit metrics that would be considered for a downgrade include a) EBITDA/ interest falls below 5.5x-6.0x, b) RCF/Net Debt drops below 15% on a consistent basis and c) gross debt/EBITDA deteriorates to exceed 3.0x-3.5x. The leverage threshold is relatively high for the rating band but is compensated by IOI's significant cash holdings.

The principal methodology used in these ratings 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.

IOI Corporation Berhad is headquartered in Malaysia and listed on Bursa Securities Malaysia. It is 46%-owned by the founding Lee family. The company is involved in oil palm plantations and resource-based manufacturing, including oleo-chemicals, as well as specialty oils and fats. IOI utilizes 174,000 hectare of palm oil plantation as of 30 June 2014.

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 confirms IOI ratings at Baa2; outlook stable
No Related Data.
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