Singapore, May 10, 2016 -- Moody's Investors Service (Moody's) has today placed on review
for downgrade the Baa2 issuer rating of IOI Corporation Berhad (IOI),
Baa2 senior unsecured bond rating of IOI Investment (L) Berhad,
and Baa2 senior unsecured bank credit facility rating of IOI Ventures
(L) Berhad.
The (P)Baa2 senior unsecured medium-term note (MTN) program rating
of IOI Investment (L) Berhad has also been placed on review for downgrade.
LIST OF AFFECTED RATINGS
On Review for Downgrade:
..Issuer: IOI Corporation Berhad
....Issuer Rating, Placed on Review
for Downgrade, currently Baa2
..Issuer: IOI Investment (L) Berhad
....Backed Senior Unsecured Medium-Term
Note Program, Placed on Review for Downgrade, currently (P)Baa2
....Backed Senior Unsecured Regular Bond/Debenture,
Placed on Review for Downgrade, currently Baa2
..Issuer: IOI Ventures (L) Berhad
....Backed Senior Unsecured Bank Credit Facility,
Placed on Review for Downgrade, currently Baa2
Outlook Actions:
..Issuer: IOI Corporation Berhad
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: IOI Investment (L) Berhad
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: IOI Ventures (L) Berhad
....Outlook, Changed To Rating Under
Review From Negative
RATINGS RATIONALE
"The review for downgrade was driven by uncertainty regarding IOI's
operating performance, particularly on its downstream business,
after its entire oil palm production was suspended by the Roundtable on
Sustainable Palm Oil (RSPO) and the resultant announcement by several
of its customers to cease cooperation with the company," says
Jacintha Poh, a Moody's Vice President and Senior Analyst.
Effective 4 April 2016, RSPO has suspended the certification for
all of IOI's oil palm production after receiving complaints by a
non-governmental organization on non-compliance of IOI's
Indonesia plantation -- which produced approximately 2% of
the company's annual crude palm oil (CPO) production --
with various RSPO Principles and Criteria and requirements.
Unilever PLC (A1 stable), Kellogg Company (Baa2 stable), Mars
Inc (unrated), and Nestle S.A. (Aa2 stable) announced
that they would not cooperate with IOI, with Unilever and Kellogg
setting a period of three-months to implement an exit process.
IOI has submitted an action plan to RSPO, which it believes will
help resolve the complaints.
However, the time frame for the resolution remains uncertain and
Moody's notes that some plantation companies have required more
than a year to satisfy RSPO's complaints.
"While potential sales losses from IOI's inability to supply
certified palm oil are not quantifiable at this point due to ongoing developments
with RSPO and its customers, we note that the company's earnings
could deteriorate significantly, which could in turn pressure its
financial metrics, if the suspension is not resolved within a year,"
says Poh.
In such scenarios, Moody's expects IOI's downstream
business to be severely impacted, particularly for customers in
Europe and the USA, who might switch to other suppliers in order
to comply with their policies on environmental sustainability.
As this is IOI's second suspension within a five-year timeframe,
Moody's also expects IOI to suffer reputational damage, which
may result in a further loss of customers.
Nonetheless, Moody's expects IOI's operating profit
for its fiscal year ending 30 June 2016 (FY2016) to remain broadly stable,
supported by an expectation that the company will benefit from a higher
average CPO price in 2H FY2016 and the assumption that it had accumulated
a sufficient amount of inventory before the suspension date to continue
producing RSPO-certified products in 4Q FY2016 for its existing
customers.
According to the Malaysian Palm Oil Board, the average CPO price
was at MYR2,413 per ton in 1Q 2016 as compared to an average of
MYR2,179 per ton recorded in 2H 2015.
The review will focus on IOI's (1) measures to resolve its suspension
by RSPO on a timely basis; (2) strategy to manage its business with
the ability to retain its customers during the suspension period;
(3) continued maintenance of a sizeable liquid assets base; and (4)
pro-active refinancing of its short-term debt maturities.
Moody's expects IOI's earnings and profitability will deteriorate,
resulting in a weakening of its financial profile such that leverage will
exceed its current ratings threshold of 4.0x, if the suspension
is not resolved swiftly.
The principal methodology used in these ratings was Global Protein and
Agriculture Industry published in May 2013. Please see the Ratings
Methodologies 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 approximately 47%-owned
by the founding Lee family, as of 10 May 2016. The company
is involved in oil palm plantations and resource-based manufacturing,
including oleo-chemicals, as well as specialty oils and fats.
As of 31 December 2015, it had around 180,000 hectares of
oil palm plantation.
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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Jacintha Poh
Vice President - Senior Analyst
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
Laura Acres
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 reviews IOI Corporation Berhad's Baa2 ratings for downgrade