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02 Dec 2008
Moody's downgrades IOI from A3 to Baa1; outlook stable
Approximately US$500 million of bonds and Yen 21 billion of loans affected
Hong Kong, December 02, 2008 -- Moody's Investors Service has downgraded the issuer rating of IOI Corporation
Berhad ("IOI") to Baa1 from A3. At the same time, the ratings
of the senior unsecured bonds and loans issued by IOI Ventures (L) Berhad,
which are guaranteed by IOI, have been downgraded to Baa1.
The outlook for all the ratings has been changed from negative to stable.
"The downgrade has been driven by IOI's aggressive financial
strategy of substantial share repurchase and hefty capital distributions
which have reduced its liquidity and increased its debt,"
says Peter Choy a Moody's Vice President and Senior Credit Officer,
adding, "This has reduced its buffer against the challenges
presented by weakened palm oil and property markets.
"Under the current difficult market conditions (including weak property
demand, low palm oil price and volatile currency) IOI's profits
are expected to lower which will weaken its credit metrics to Debt/EBITDA
of 3.5x -- 2.2x and EBITDA/interest of 6.6x
-- 9.2x; such metrics would no longer support its current
A3 rating," says Choy.
"In addition, IOI's financial profile is not likely
to improve in the foreseeable future as the global economic woes will
continue to pressure the property market and palm oil prices,"
Nevertheless, IOI's Baa1 ratings are supported by (a) the
favourable long-term outlook for palm oil demand; (b) its
position as a global top-tier palm oil producer and efficient operations;
(c) good access to capital and bank markets; and (d) management's
good track record in managing the palm oil business through the industry
The ratings outlook is stable on the basis that IOI will continue to exercise
prudence in managing its currency derivative transactions to hedge its
currency risk. Furthermore, it will not embark on further
major acquisitions and shares repurchase thereby increasing its leverage.
Moody's expects IOI will have sufficient liquidity from existing
cash, prearranged credit facilities and operating cash flow to fund
its capital expenditures, dividends and debt service.
The possibility of upward rating pressure on IOI in the near term is limited
given the weak palm oil and property markets. However, upgrade
pressure could emerge over time if IOI is able to reduce its overall debt
level through either converting the exchangeable bonds or prepaying some
of its debt from operating cash flow. Under this situation,
its credit metrics would return to Debt/EBITDA in the range of 1.7x
- 2.2x and EBITDA/interest coverage of 10X or above.
Downward pressure on IOI's ratings could emerge if (a) pressure
on downstream operation profit margins results in a declining trend in
IOI's overall profitability, such that EBITDA margin declines below
19%; (b) weaker palm oil production from some of its aging
plantations results in a material decline in profitability of the plantation
business; (c) ownership in IOI Properties Berhad, IOI Oleochemical
Industries Bhd or Loders Croklaan Group BV declines to less than 50%
so that IOI loses management control; and/or (d) aggressive acquisitions
occur, which do not generate satisfactory returns and raise IOI's
overall risk profile, such that EBITDA/gross interest falls below
6.0x -- 6.5x and Debt/EBITDA exceeds 3.5 --
IOI's ratings have been assigned by evaluating factors that Moody's
believe are relevant to the company's risk profile, such as
the company's (i) business risk and competitive position compared
with others within the industry; (iii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk.
These attributes were compared against other issuers both within and outside
IOI's core industry; IOI's ratings are believed to be
comparable to those of other issuers with similar credit risk.
The last rating action was on 11 January 2008 when IOI's ratings
were affirmed following its announcement of an investment in a 65%
joint-venture property project in Sentosa through its property
subsidiary, IOI Properties Berhad.
IOI Corporation Berhad is headquartered in Malaysia and listed on Bursa
Securities Malaysia. The company is involved in oil palm plantations
and resource-based manufacturing, including olechemicals,
as well as specialty oils and fats. It is also a property development
and investment group.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Senior Vice President
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
No Related Data.
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