Fitch Ratings Downgrades Sawit Sumbermas and Sinarmas Agro

JAKARTA, SAWIT INDONESIA –  Fitch Ratings has taken negative rating actions across our coverage of palm-oil producers in Indonesia and Malaysia after completing a portfolio review. The review resulted in one rating downgrade and two rating affirmations with Outlook revisions to Negative from Stable. Simultaneously, Fitch Ratings Indonesia has downgraded the ratings of four companies and revised the Outlook of one to Negative from Stable after affirming the rating. They are listed below and also discussed in the key rating driver section.

The portfolio review followed the revision in our Malaysian benchmark crude palm oil (CPO) price forecasts for 2020 and 2021, which have been trimmed by USD30/tonne and USD15/tonne to USD520/tonne and USD560/tonne, respectively. We have lowered our palm-oil demand expectations for 2020-2021 due to the sharp fall in CPO prices, which is likely to discourage biodiesel blending due to the wide palm oil-gas oil spreads, and reduced edible-oil demand as people cut their travel and outside-food consumption. Supply is also likely to rise due to better weather conditions and yields. We continue to assume a CPO price of USD600/tonne from 2022.

Fitch has downgraded PT Sawit Sumbermas Sarana Tbk’s (SSMS) Long-Term Foreign-Currency Issuer Default Rating to ‘CCC+’ from ‘B-‘, and the rating on the USD300 million 7.75% senior notes due 2023 issued by its subsidiary, SSMS Plantation Holdings Pte. Ltd., to ‘CCC+’ from ‘B-‘, with a Recovery Rating of ‘RR4’. Fitch Ratings Indonesia has also downgraded SSMS’s National Long-Term Rating to ‘BB-(idn)’ from ‘BBB-(idn)’. The Outlook is Stable.

SSMS’s rating is based on the consolidated profile of its parent, PT Citra Borneo Indah (CBI), which owns 54% of the company. The downgrade reflects our estimate that CBI’s net debt/EBITDA leverage for 2019 increased to above 10x and EBITDA/interest coverage was below 1x, implying high refinancing risk for its US dollar bonds despite adequate near-term liquidity.

“We expect leverage to decline to below 10x and coverage to improve to above 1x in 2020, driven by higher SSMS EBITDA due to better yields and CPO output. However, losses at other CBI businesses, large outflows from related-party transactions and acquisitions and an inability to control costs could hamper an improvement in CBI’s financial metrics,” Fitch said in a statement on Wednesday (6 May 2020).

The Outlook for Malaysia-based palm-oil producer Sime Darby Plantation Berhad’s (SDP) Long-Term Issuer Default Rating has been revised to Negative from Stable and all ratings have been affirmed at ‘BBB’. The Negative Outlook reflects the risk that the coronavirus pandemic may further delay SDP’s assets disposal plans. This, combined with the revised CPO price assumptions, will likely keep its leverage, measured as FFO net leverage, above the negative rating sensitivity of 3x for an extended period. Fitch previously expected SDP’s leverage to fall closer to 3x by end-2021. However, Fitch now expects the company’s deleveraging trajectory to be delayed by around one year.

Fitch Ratings Indonesia has downgraded the National Long-Term Ratings of PT Sinar Mas Agro Resources and Technology Tbk (SMART), PT Ivo Mas Tunggal (IMT) and PT Sawit Mas Sejahtera (SMS) to ‘A-(idn)’ from ‘A(idn)’. The Outlook is Stable. Simultaneously, Fitch Ratings Indonesia has chosen to withdraw the rating of SMART for commercial reasons.

The ratings for the three entities, which are based on the consolidated profile of Golden Agri-Resources Ltd. (GAR), have been downgraded based on Fitch’s expectation that although GAR’s net debt-to-EBITDA leverage will decline from the 2019 level of over 8x, the ratio will remain above our previous threshold for negative rating action of 5.5x over the next three years. Fitch’s computation of GAR’s leverage includes corporate guarantees but excludes any inventory-related benefits. GAR’s large scale and vertical integration support its business and credit profile, although its leverage is significantly higher than that of similarly rated sector peers.

PT Tunas Baru Lampung Tbk’s (TBLA) Long-Term Issuer Default Rating has been affirmed by Fitch at ‘B+’ but the Outlook has been revised to Negative from Stable. The rating on the USD250 million 7% senior unsecured notes due 2023, issued by wholly owned subsidiary TBLA International Pte. Ltd. and guaranteed by TBLA and all its majority-owned operating subsidiaries, has also been affirmed at ‘B+’ with a Recovery Rating of ‘RR4’. Fitch Ratings Indonesia has also revised the Outlook on the National Long-Term Rating to Negative from Stable and at the same time affirmed the rating at ‘A(idn)’.

TBLA’s net debt-to-EBITDA leverage stood at 3.6x in 2019 and we expect the ratio to increase in 2020. However, we also expect leverage to decline from 2021 based on our estimate of increasing EBITDA due to capacity expansion, higher product sales volumes and better average CPO prices. TBLA’s rating benefits from its diversification into the sugar business as well as vertical integration as it has substantial downstream refining and processing capacity for palm oil and presence across the value chain from plantations to refining in the sugar industry. However, its working capital has been volatile and capex has often been higher than our expectations. These present risks to deleveraging, which are reflected in our Negative Outlook.

‘A’ National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher- rated category.

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