IQPlus, (26/08) - Moody's Investors Service has downgraded the corporate family rating (CFR) of Sawit Sumbermas Sarana Tbk (P.T.) (SSMS) to B2 from B1. At the same time, Moody's has downgraded the senior unsecured rating on the $300 million notes issued by its wholly owned subsidiary, SSMS Plantation Holdings Pte. Ltd., to B2 from B1.
The outlook is maintained at negative.
RATINGS RATIONALE
"The downgrade reflects our expectation that SSMS' credit metrics will remain materially weaker than previous expectations, driven primarily by continued soft earnings at the group's downstream operations," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.
SSMS' CFR reflects the credit quality of its parent, Citra Borneo Indah (P.T.) (CBI), which consolidates SSMS. CBI's credit metrics have weakened in recent years, in part due to elevated capital spending to construct its downstream operations, consisting of a palm oil refinery and industrial park.
CBI's adjusted leverage, as measured by adjusted debt/EBITDA, increased to 7.4x in 2018 from 3.8x in 2017 on higher borrowings and lower earnings due to weaker low palm oil prices and startup losses at the refinery.
The downstream refinery has faced challenges since commencing operations in mid-2018 primarily driven by insufficient tankage capacity to store its feedstock and finished product, resulting in production bottlenecks and higher per unit costs.
"While CBI is building additional tankage capacity this year, we do not expect the refinery to experience a material earnings increase in the near term. As a result, we estimate its adjusted leverage will remain elevated at 6.5x-7.5x over the next 12-18 months, which is considerably higher than our previous expectation of around 4.5x and inconsistent with the previous B1 ratings," adds Hasnain, also Moody's Lead Analyst for SSMS.
CBI's strong liquidity, with a large cash balance of around IDR2.1 trillion at 31 March 2019, provides a level of cushion against volatile CPO prices and a degree of financial flexibility in the event the company seeks to make earnings-accretive acquisitions of palm oil plantations. However, any acquisition will take time and is likely to entail execution risk as the company integrates the new businesses into its operations.
Nonetheless, SSMS' B2 CFR continues to reflect its efficient and profitable operations at its upstream palm oil plantations, which will benefit from favorable long-term demand for palm oil.
The rating also considers SSMS' exposure to the following environmental, social and governance (ESG) risks.
First, the company is exposed to moderate environmental and social risks associated with the palm oil sector. Following negative publicity and allegations in recent years, the company has strengthened its sustainability practices, including around environmental management and stakeholder engagement. The company also aims to have all its plantations and mills certified with the Roundtable for Sustainable Palm Oil (RSPO) by 2020. The RSPO is an association of palm oil industry stakeholders that promotes the sustainable growth and use of palm oil products.
Second, Moody's has also considered the governance risks related to the company's concentrated ownership, with Pak Abdul Rasyid and his family owning around 70% of SSMS and 98% of CBI. In addition, while SSMS is a publicly listed company which makes regular filings with the Indonesian Stock Exchange, CBI, which consolidates the group's downstream operations, is a private company with limited public disclosures.
The rating outlook is negative, reflecting Moody's expectation that, on a consolidated basis, CBI's credit metrics will remain weak for its current ratings, in light of elevated debt levels, and in the absence of a material increase in earnings over the next 6-12 months.
Upward ratings pressure is unlikely, given the negative outlook. Nevertheless, the outlook could return to stable if CBI shows improved earnings or reduced debt, while maintaining prudent financial policies. (end)
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