CORPORATESSECTOR IN-DEPTH 22 SEPTEMBER 2015ANALYST CONTACTSAlan Greene 65-6398-8318VP-Sr Credit Officer alan.greene@moodys.comVincent Tordo 65-6398-8331Associate Analyst vincent.tordo@moodys.comLaura Acres 65-6398-8335Managing Director - Corporate Finance laura.acres@moodys.comPalm Oil AsiaCredit Quality Weakens as Crude Palm Oil Prices Stay Low on Oversupply Asian palm oil companies can't delever at current crude palm oil (CPO) prices. Palm oil producers, which borrowed heavily in the last three years to fund growth, are facing difficulties reducing their debt burden owing to an extended period of low vegetable oil prices. Average CPO prices have fallen more than 30% to MYR2,191/tonne in the second quarter of 2015 from Q2 2012, and averaged MYR2,067/tonne in July/August.Negative rating actions on three palm oil companies reflect poor cash generation. We downgraded Golden Agri-Resources Ltd 's corporate family rating by one notch to Ba3 on 4 September because its revenue and profitability plunged, pushing its debt/EBITDA above 6.0x from 4.0x at 31 December 2013. We kept the rating outlook negative because the company may find it challenging to reverse the rise in leverage unless CPO prices recover significantly. We also lowered the outlooks for Sime Darby Berhad (A3) and IOI Corporation Berhad (Baa2) to negative from stable to reflect poor cash-flow generation and climbing leverage, which pressure credit quality.Slow adoption of vegetable oil in biofuel uses aggravates oversupply. The search for new sources of renewable energy and the provision of employment are the main reasons for the massive plantings of palm oil, soybean and rapeseed crops in recent years in emerging economies and developed markets. Vegetable oil supplies have surged far in excess of food requirements, but biofuel and industrial applications of vegetable oils have not taken off in Asia. Meanwhile, low crude oil prices make it commercially unattractive to convert vegetable oils to biodiesel.Industry focus on downstream activities neglects core cash-generating plantation operations. Low production costs underpin the cash generation of palm oil plantations, which are profitable. However, few palm oil companies are focused solely on palm oil cultivation and CPO production, with most striving to offer downstream refining, specialty products, and trading and marketing operations to extract the maximum spread per tonne of CPO produced. This has led to overcapacity in downstream refining and poor returns on such investments.MOODY'S INVESTORS SERVICE CORPORATESThis publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.2 22 SEPTEMBER 2015 PALM OIL ASIA: CREDIT QUALITY WEAKENS AS CRUDE PALM OIL PRICES STAY LOW ON OVERSUPPLYPalm oil companies can't delever a...
