Moody's Affirms IOI Corp’s Baa2 Rating, Assigns Baa2 to Proposed US Dollar Notes
18/10/2021The Edge Markets

(File pic by IOI Corporation).

KUALA LUMPUR (Oct 18): Moody's Investors Service has affirmed IOI Corp Bhd’s Baa2 issuer rating.

In a statement on Monday, Moody’s has assigned the Baa2 backed senior unsecured bond rating to its subsidiary IOI Investment (L) Bhd, and the Baa2 backed senior unsecured bank credit facility rating to IOI Ventures (L) Bhd.

Moody's has also affirmed the provisional (P) Baa2 backed senior unsecured rating on IOI Investment’s medium-term note (MTN) programme.At the same time, it has maintained a stable outlook on the ratings.

Besides, Moody's has also assigned Baa2 backed senior unsecured rating to the proposed notes to be issued under IOI Investment's MTN programme.

It added that the notes are unconditionally and irrevocably guaranteed by IOI and will rank pari passu (on equal footing) with all of the group’s senior unsecured obligations.

"The ratings affirmation reflects our expectation that IOI will maintain profitable operations while taking a prudent approach to investment and shareholder returns, such that they do not materially weaken the company's credit profile,” according to Moody’s vice president and senior analyst Maisam Hasnain.

Hasnain, who is also the lead analyst for IOI, said the proceeds from the proposed notes issuance will help the group to alleviate refinancing risk associated with its US$600 million notes due in June 2022, while allowing it to maintain strong liquidity.

According to Moody’s, IOI's Baa2 ratings reflect its established position as an efficient palm oil producer with integrated operations across the palm oil value chain, its track record of managing profitability through multiple commodity price cycles, and its ability to benefit from favourable long-term demand for palm oil.

It expects IOI's adjusted leverage — as measured by adjusted debt/earnings before interest, taxes, depreciation, and amortisation (EBITDA) — to decline to around 2.5 times over the next 12-18 months from 3.3 times for the fiscal year ended June 2021.

This improvement, it noted, will be driven by earnings growth amid high crude palm oil (CPO) prices and debt reduction of around RM400 million-RM500 million with cash on hand.

“Demand for IOI's palm oil products has remained solid despite the pandemic, and the company's operations have not been significantly disrupted by periodic movement control restrictions in Malaysia. In addition, the high CPO price has boosted earnings at IOI's plantations segment in recent quarters, despite lower CPO production amid heavy rainfall and a decline in mature planted hectarage as older trees were replanted.

“Moody's also expects IOI to take a measured approach toward future investments such that its leverage does not exceed its downgrade trigger of 3.5x. The company has utilized only 17% of the RM960 million it had earmarked for investments, from the RM3.8 billion it had received in asset sale proceeds in 2018,” said Moody’s.

Furthermore, it expects that IOI will likely use the proceeds to acquire brownfield plantation estates in Malaysia. If IOI has not identified a suitable target, it can extend the time frame to complete an investment beyond the current extended time frame of December 2022.

At the same time, Moody’s said IOI's ratings incorporate its exposure to volatile palm oil prices, which can affect its credit metrics, and the increasing stakeholder scrutiny, including customers and lenders around environmental, social, and governance (ESG) risks associated with the palm oil sector.

“IOI has strengthened its sustainability policies in recent years to mitigate environmental and social risks associated with palm oil production. These include committing to a policy of no deforestation, no development on peat, and no exploitation of workers, including a zero-recruitment-fee policy for migrant workers since 2017. IOI is also a founding member of the Roundtable on Sustainable Palm Oil (RSPO), an association of industry stakeholders that promotes the growth and use of sustainable palm oil products.

“In terms of governance risks, Moody's has considered IOI's concentrated ownership, given that the founding Lee family owns a 50% stake in the company. This risk is somewhat mitigated by the oversight exercised through the presence of majority independent directors on the company's board, and by minority shareholders including Malaysia's Employees Provident Fund Trust, which owns a 13% stake in IOI.

“IOI's inadequate liquidity position will improve considerably if the company is able to raise enough funds via the issuance of its proposed notes to eliminate near-term refinancing risk. This is because the company's cash balance and projected operating cash flow are currently insufficient to meet its cash needs over the next 12 months due to its large US$600 million notes maturity in June 2022,” it added.

At noon break, shares of IOI Corp were traded at RM4.04, declining by one sen or 0.25% with some 472,900 shares done. This gave the group a market capitalisation of RM25.39 billion.