KUALA LUMPUR: Moody's Investors Service has affirmed the Baa1 issuer rating of IOI Corporation Bhd (IOI) as well as of the senior unsecured bonds and loans issued by IOI Ventures (L) Bhd, and which are guaranteed by IOI.
Moody's said on Monday, Oct 12 that it had also changed the outlook for the ratings to stable from negative.
"IOI has improved its management of currency risk by terminating its structural foreign exchange derivative transactions, and it now only maintains those currency and interest rate swaps that hedge its borrowings," said a Moody's vice president and senior credit officer Peter Choy.
He said IOI Corp had also strengthened its management of credit sales to minimise its bad debt.
"Such changes have, in turn, provided more stability to its financial position, and have supported the change in its ratings outlook," said Choy.
He said IOI's operating environment had stabilised as the global economic downturn appeared to have bottomed, and the main palm oil-importing markets -- India and China -- continue to post resilient economic growth.
Choy said this situation was expected to stabilise IOI's business over the medium term.
IOI was expected to experience lower average prices for crude palm oil, which would reduce its earnings before interest, tax, depreciation and amortisation (EBITDA) margin to below 20%.
"(However), its projected credit metrics -- debt/EBITDA of 2.2 times to 2.4 times, RCF/net debt (retained cashflow/net debt) of 25% to 30%, and EBITDA/interest of 9 times to 10 times -- for the next 12 to 18 months still adequately position its rating at the Baa1 level," Choy said.
"With debt maturities well spread out, and supported by undrawn committed banking facilities and abundant cash of RM2.4 billion, as of June 30, 2009, IOI has maintained a strong liquidity profile, thereby providing it with a buffer robust enough to cope with any challenge to its business in the next 12 to 18 months," Choy added.
IOI's ratings are supported by the favourable long-term outlook for palm oil demand; its position as a global top-tier palm oil producer with efficient operations; its good access to the capital and bank markets, and management's good track record in managing the palm oil business throughout the business cycle.
At the same time IOI's ratings are tempered by both the commodity and cyclical pricing character of palm oil; the cyclicality of its property business; and its track record for aggressive financial management of capital distribution, debt incurrence and share buy-backs to maximize shareholder returns.
The possibility of upward rating pressure on IOI's ratings in the near term is limited, given the volatility in the palm oil and property
markets.
However, upgrade pressure could emerge over time if IOI further reduces its overall debt, such RCF/Net Debt surpasses 35% and EBITDA/interest coverage measures 10 times or above.
Downgrade pressure on IOI could emerge if:
(1) pressure on its downstream operation's margins continues, resulting in protracted weakness in profitability, such that EBITDA margin remains below 19%;
(2) weaker palm oil production from some of its ageing plantations results in a material reduction in the profitability of its plantation segment;
(3) ownership by IOI Properties Berhad, IOI Oleochemical Industries Bhd and Loders Croklaan Group BV declines to less than 50%, such that it loses
management control; and/or
(4) aggressive acquisitions occur, and which do not generate satisfactory returns, and raise its overall risk profile, such that EBITDA/gross interest falls below 6 times to 7.0 times and RCF/net debt drops below 25% on a consistent basis.
The last rating action with regard to IOI was taken on March 2, 2009, when the company's issuer and debt ratings outlook was changed to negative following its release of its 1H FY2009 results.