PETALING JAYA: Standard & Poor’s Ratings Services (S&P) yesterday reaffirmed its BBB+ corporate credit rating and stable outlook on IOI Corp Bhd, following a negative outlook announced by Moody’s Investors Service last Friday.
At the same time, S&P affirmed the BBB+ issue rating on IOI’s guaranteed senior unsecured notes and its axA+ Asean scale rating on the plantation giant.
S&P attributed its ratings to IOI’s steady operating performance expected over the next 12 to 18 months, underpinned by favourable crude palm oil (CPO) prices and strong demand from China and India.
“We continue to assess IOI’s business risk profile as ‘satisfactory’ and its financial risk profile as ‘intermediate’,” said S&P credit analyst Wee Khim Loy in a statement yesterday.
However, Moody’s warned last Friday it may lower its rating for IOI if reduced demand for CPO-related products weakens the group’s margins, or continued high debt-funded investments in the property business weaken IOI’s financial metrics.
Moody’s said IOI’s total debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio exceeding 2.8 times on a sustained basis would be a downgrade trigger. It added that the limited diversity and the inherent volatility in IOI’s businesses limit the potential for a rating upgrade.
Moody’s has affirmed its Baa1 rating on IOI, but changed the outlook to negative to reflect IOI’s utilisation of substantial free cash flow from its vast Malaysian palm oil operations for the purpose of growing its property development business.
This, the agency said, together with high dividend payouts, have resulted in a gradual deterioration of credit metrics, which offers little or no additional headroom within IOI’s Baa1 rating.
“At the same time, IOI is constructing large investment properties in Malaysia which also slow the cash cycle,” said Alan Greene, Moody’s lead analyst for IOI. Greene is also Moody’s vice-president, Senior Credit Office.
However, S&P’s statement disagreed with Moody’s as it believes the industry risks associated with the plantation business and property development can be partly offset by IOI’s current “strengths”.
The strengths are IOI’s integrated palm oil operations, the favourable age profile of its oil palm plantations, its sound access to capital markets and competitive cost position, said S&P.
It noted that more than 70% of IOI’s plantations are in the “prime stage”, when a plant’s fruit-bearing ability is the highest. Furthermore, it said the company’s key operating parameters such as yield per mature hectare and oil extraction rates for CPO and palm kernel are better than the industry average, helping IOI to maintain competitive cost.
Moody did say IOI’s liquidity and debt maturity profile remain strong, with its next large on balance sheet debt repayment of US$500 million (RM1.5 billion) bonds due only in 2015. Its cash position was RM3.2 billion as at Dec 31, 2011.
However, it noted that IOI’s proportion of guaranteed debt in the Singapore property joint ventures of some S$847 million (RM2.1 billion) is significant relative to IOI’s gross debt of RM5.8 billion as at Dec 31, 2011.
Since December 2011, IOI has also paid S$408 million for a mid-market condominium site in Singapore.
Moody’s added that IOI’s ratings outlook is negative after considering disbursements to support its plans for plantation expansion, property development, capital expenditure and significant returns to shareholders.
It also said there has been a gradual deterioration in IOI’s credit metrics, adding that IOI’s debt over Ebitda as at end-December 2011 was 2.2 times and Ebitda over revenue 13.9%.
“The Baa1 rating is therefore stretched to accommodate the greater involvement in property development, with little cushion for any disappointments in palm oil or aggressive shareholder returns,” said Moody’s.
In the meantime, Reuters reported yesterday that IOI has hired banks for a bond raising exercise. The news wire also said the company has planned a meeting with bond investors in Singapore, Hong Kong and London early this week.
The report did not say the amount and rationale of the fundraising exercise. As at Dec 31, 2011, IOI’s debt stood at RM5.66 billion, cash at RM3.2 billion and shareholders’ fund at RM12.07 billion.