JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded the corporate family rating of PT Sawit Sumbermas Sarana Tbk (IDX:SSMS) to B3 from B2. At the same time, Moody’s has downgraded the senior unsecured rating on the US$300 million notes issued by its wholly-owned subsidiary, SSMS Plantation Holdings Pte. Ltd. to B3 from B2.
The outlook on the ratings remains negative.
“The downgrade reflects our expectation that SSMS’ credit profile will be materially weaker than our previous expectation, weighed by negative earnings from its downstream operations, as well as by the limited transparency around its group operations amid significant related party transactions,” says Maisam Hasnain, a Moody’s Assistant Vice President and Analyst.
SSMS’ CFR reflects the credit quality of its parent, PT Citra Borneo Indah (CBI), which consolidates SSMS. CBI’ credit metrics have weakened in recent years, partly due to operating losses and elevated capital spending associated with the development of its downstream operations, including a new palm oil refinery and industrial park.
For the six months ended June 2019, CBI generated operating losses of around Rp45 billion ($3.21 million), with earnings from the company’ upstream operations offset by losses at its other businesses, including its refinery business. High-level financial information provided by the company on its third quarter (3Q) 2019 earnings call suggests that the refinery continued to generate operating losses during the quarter.
“As a result of continued operating challenges and uncertainty around when the refinery will materially improve its operations, we estimate CBI’ consolidated leverage will remain considerably higher than the 5.5x downward trigger for its previous B2 rating over the next 12-18 months,” adds Hasnain.
Moody’s also expects that Sawit Sumbermas will continue to financially support CBI, including the refinery operations. Since December 2018, SSMS has increased loans to CBI to Rp2.4 trillion in September 2019, from Rp1.6 trillion.
SSMS also generated 86 percent of its revenue from sales to the refinery for the nine months ended September 2019. Continued support to the refinery is a shift from SSMS’ previously stated plans that the refinery would largely operate as an independent unit.
Outside of intergroup transactions, Citra Borneo also has considerable related party transactions in the form of receivables and payables with affiliates and shareholders. While CBI’ financial statements show that these transactions involve operational expenses associated with related parties, there is limited clarity on the specific nature of these payments.
In addition, these related party transactions point to weak financial controls and limited corporate transparency. While the company has stated that it plans to streamline its corporate structure, which could improve transparency, the timing and details of such plans remain uncertain.
CBI’ credit profile is supported by its strong liquidity, with a large cash balance of around Rp2.1 trillion at Sept. 30, 2019. This provides a cushion against volatile crude palm oil prices and the ability for the company to support its loss-making downstream operations in the near-term.
However, a material reduction in its cash balance from current levels would lead to further immediate negative rating pressure. The rating also considers the company’s exposure to the following environmental, social and governance risks.
First, the rating considers the increasing stakeholder scrutiny around 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 improving its environmental management and stakeholder engagement.
The company 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 sustainable growth and use of palm oil products.
Second, Moody’s has considered the governance risks related to the company’ concentrated ownership, with Abdul Rasyid and his family owning around 70 percent of SSMS and 100 percent of CBI. In addition, 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.
Governance risk is further elevated by the large number of related party transactions between group entities at CBI, between CBI and its shareholders, and by the absence of meaningful controls restricting flows between both companies.
The rating outlook is negative, reflecting Moody’s expectation that on a consolidated basis, CBI’ credit metrics will remain weak for its current ratings over the next 6 – 12 months, and that limited transparency around group operations will continue to weigh on CBI’ credit profile.
Upward ratings pressure is unlikely, given the negative outlook. Nevertheless, Moody’s could change the outlook to stable if CBI shows improved earnings or reduced debt, while maintaining prudent financial policies and improving corporate transparency, particularly around its downstream operations and related party transactions.
Alternatively, Moody’s could downgrade the ratings if CBI fails to implement its business plan, in particular for its downstream business, such that its earnings do not improve. Then, the company undertakes large debt-funded acquisitions that materially weaken its credit profile or there is evidence of material cash leakage outside of SSMS.
Sumbermas is a palm oil producer with a market capitalization of around Rp8.4 trillion at Dec. 13, 2019.
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