Thursday 05, January 2017 by Jessica Combes

RAM Ratings revises outlook on Golden Agri's IMTN Rating to Stable, reaffirms rating

RAM Ratings has revised to stable from negative the outlook on the A1(s) rating of Golden Assets International Finance Limited's (Golden Assets) RM5.0 billion Islamic MTN Programme (2012/2027), and reaffirmed the rating. Golden Assets is a funding conduit of Golden Agri-Resources Ltd (GAR or the Group).

The revision of the outlook is premised on GAR's stabilised debt level after the expansion of its downstream capacity was completed as well as expectations of progressive debt reduction in view of reduced capex needs going forward. The Group's adjusted funds from operations debt cover (FFODC) (after adjusting for readily marketable inventories (RMI) and refundable taxes) is estimated to stay above 0.15 times under its stressed scenario, as its debt level is projected to decline gradually to about $2.5 billion over the next few years.

In addition, GAR's debt coverage for 9M FY Dec 2016 was better than expected following a recovery in CPO prices and stronger downstream margin. For 9M FY Dec 2016, CPO prices rebounded to an average of $650 per metric tonne (MT) (2015: $574/MT) due to weaker palm oil output across the industry. This, along with a stronger downstream margin (+1.2 percentage points higher at three per cent), had outweighed GAR's lower CPO output which had contracted 24 per cent y-o-y. As a result, GAR's annualised operating profit before depreciation, interest and tax (OPBDIT) for 9M FY Dec 2016 has exceeded our expectations, although lower y-o-y. Its RMI-adjusted FFODC was about 0.18 times for the same period (annualised).

Meanwhile, the long-term rating takes into account the Group's dominant position as the largest planter in Indonesia and second largest globally. Additionally, its integrated operations provide some stability against commodity price volatility. GAR's strong agronomic practices continue to ensure that its yields stack up favourably against those of large regional peers. Nevertheless, its productivity will be 15 per cent-20 per cent lower in 2016 due to the lagged effects of El Nino weather conditions, albeit recovering in 2017, as these effects gradually dissipate. The Group's business profile is further supported by its relatively low cost structure, which provides good buffers during cyclical challenges. Its older tree profile, however, makes active replanting crucial in sustaining long-term production.

The rating is moderated by GAR's still-high leverage from debts taken on to build new refineries and to fund long-term investments. High leverage also stems from large working capital for the Group's enlarged downstream operations and increased exposure to destination market sales. As at end-September 2016, the Group's debt level of $3 billion translated into a fairly high RMI-adjusted debt-to-annualised OPBDIT ratio of 5.5 times. Nonetheless, its debt level is expected to progressively ease as lighter capex needs can be sufficiently met by its operational cash flows.

As with all planters, the Group is highly exposed to the volatility of CPO prices and rising pressure stemming from environmental issues. Further, with plantations primarily in Indonesia, GAR operates within a more challenging landscape, having to contend with a still-evolving regulatory framework, protracted negotiations with land owners and infrastructure bottlenecks. The rating also factors in the Group's history of debt rescheduling.

GAR is principally involved in the cultivation of oil palm, milling and refining operations in Indonesia, as well as downstream operations in China. Through a Deed of Covenant, the Group irrevocably and unconditionally provides an undertaking to the Trustee, for the benefit of the IMTN holders, to fulfil its obligations to Golden Assets to meet principal and profit payments or any amount falling due under the facility. As such, the rating of the IMTN Programme reflects GAR's credit risk.


Features & Analyses