It said the outlook on the rating remains negative.
“The downgrade reflects an ongoing erosion in palm oil prices such that they have now hit six-year lows and our view that GAR will be unable to reduce leverage significantly in the next six to nine months from over 6x currently, and its liquidity will continue to remain under pressure,” says Alan Greene, a Moody’s Vice President and Senior Credit Officer.
Despite adverse market conditions, Golden Agri-Resources has continued to make further progress towards refinancing the probable put on its convertible bonds on Oct. 4, 2015.
In respect of refinancing activity, GAR has continued to make market purchases of the convertible bonds reducing the outstanding to $284 million (originally a $400 million issue). In addition, its Indonesian subsidiary PT Ivo Mas Tunggal (unrated) has arranged and drawn on a $300 million working capital and term loan facility.
Nevertheless, liquidity remains tight with the current ratio 1.04x at end Q2 compared to 1.06x at end Q1 2015. Even if the convertible bond were to be fully refinanced with long-term debt, the pro forma current ratio would be 1.22x, which is still weak for a commodities trading business.
Moody’s believes that the global surplus of vegetable oils is due to oversupply and exacerbated by low crude oil prices and that the creation of biodiesel demand represents the easiest way to absorb the current over-production of vegetable oil.
Golden Agri-Resources is building two biodiesel plants, each of 300,000 tonne per annum capacity, which are likely to enter commercial production, one in 2016 and the other in 2017. These represent the bulk of GAR’s capital expenditure requirement in the next 12 months, as it has halted new planting pending environmental reviews.
“The desire to bring the biodiesel assets on-stream as soon as possible, means that there is limited flexibility in GAR’s discretionary cash flow, and so expenditure on business investments and capex may well exceed our expectations for 2015,” comments Greene.
At current CPO prices, GAR’s upstream activities are still profitable and can achieve cash profits of up to $200 per tonne; but, if its non-plantation businesses continue to underperform — then leverage will keep rising.
GAR’s downstream investments have yet to yield meaningful returns largely because other players have adopted similar strategies, resulting in overcapacity in refining.
However, the recent introduction of new differentiated levies on CPO and refined product exports out of Indonesia could help refining margins in the short-term, while in the longer-term, the successful roll out of Indonesia’s biodiesel policy could provide substantial benefit to both GAR’s plantation and downstream operations.
“Nevertheless, based on our expectations, and in the absence of a major recovery in the price of CPO — which is the key determinant of its EBIDTA — or asset disposals, GAR will likely show a fourth consecutive year of negative free cash flow and rising net debt in FY2015,” says Greene.
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 EBITA/interest better than 3.5x to 4.0x, CFO/Net debt of over 20% and debt/EBITDA below 4.0x.
The rating may show further 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 5% to 6%; 2) EBITA/interest falls below 2.5-3.0x; or 3) CFO/Net Debt falls below 15% -18%; and 4) adjusted debt/EBITDA remains above 4.5x, all on a sustained basis.
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. (*)