RAM Ratings has downgraded the issue rating of Golden Assets International Finance Limited's (Golden Assets) IMTN Programme of up to RM5.0 billion (2012/2027) from AA2(s)/Stable to AA3(s)/Negative. Golden Assets is a funding conduit, wholly-owned by SGX-listed Golden Agri-Resources Ltd (GAR or the Group).
The downgrade is premised on GAR's cashflow debt protection that has declined to levels no longer supportive of the previous assigned credit rating. The Group's total adjusted gross debt had risen to USD 2.97 billion as at end-September 2014 - an amount much higher than the expected USD2.2 billion, to fund its capex, long-term investments and heftier working capital requirements for its enlarged downstream operations. This, coupled with cashflow generation that was dampened by weaker commodity prices and refining margins as well as losses at its oilseeds business, had reduced GAR's adjusted funds from operations debt cover (FFODC) to 0.20 times in FY Dec 2013 and 0.14 times in 9M FY Dec 2014 (FY Dec 2012: 0.31 times) - levels that are considerably lower than the 0.3-0.4 times anticipated when the AA2 rating were assigned and at the lower end of the 0.2-0.3 times expected last year. Concerns over GAR's FFODC hovering below 0.20 times in the medium term amid weak commodity prices and high debt levels underpin the negative outlook on the rating.
The rating is constrained by GAR's fairly aggressive expansion plans. Apart from capex for its downstream facilities, the Group had sunk a significant amount of capital into long-term investments, notably private-equity funds that invest in plantation assets (i.e. Liberia). Coupled with investments in renewable energy businesses in Europe, GAR's total long-term investments had increased from USD90.7 million as at end-December 2011 to USD886.5 million as at end-September 2014. We are cautious of the Group's investments in private-equity funds that are typically opportunistic and have finite life spans. Nevertheless, GAR is the sole investor and technical adviser to The Verdant Fund LP (one of its long-term investments), and has the first right of refusal should the fund dispose of its plantation assets.
Elsewhere, apart from GAR's susceptibility to cyclical commodity prices and its exposure to the more challenging operating landscape in Indonesia, the Group's credit profile is moderated by its history of debt rescheduling. Being part of the Sinar Mas group (founded by the Widjaja family), GAR had to reschedule its debt as a result of other companies within the Sinar Mas group defaulting on their debt in 2001. GAR has since made efforts to ensure the independence of the Group's operations, including reducing the Widjaja family's representation on its board to 3 members from 5, and decreasing the Widjajas' effective stake in the Group from 75% to below 50%.
All said, the rating continues to be supported by GAR's dominant position within the oil palm sector. The Group has an integrated business model, having been a long-time producer of various palm-based refined products. It remains the largest plantation group in Indonesia and second largest globally, with a sizeable planted area of 471,536 hectares as at end-September 2014. GAR's favourable plantation-management practices are reflected in its commendable productivity track record, its healthy fresh fruit bunch yields and oil extraction rates being among the highest of that of large regional peers. The Group's relatively low cost structure also provides a buffer against CPO price downcycles.
GAR is principally involved in the cultivation of oil palm, milling and refining operations in Indonesia, and downstream operations in China. Through a Deed of Covenant, GAR irrevocably and unconditionally provides an undertaking to the Trustee, for the benefit of the IMTN holders, to fulfill 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.
Media contact
Juliana Koay
(603) 7628 1169
juliana@ram.com.my
© Press Release 2015
