OREANDA-NEWS. Fitch Ratings Indonesia has revised the Outlooks on Indonesia-based palm oil producers PT Sinar Mas Agro Resources and Technology Tbk (SMART), PT Ivo Mas Tunggal (IMT) and PT Sawit Mas Sejahtera (SMS) to Negative from Stable. The National Long-Term Ratings on the three companies are affirmed at 'AA(idn)'. SMART, IMT and SMS are wholly owned by Golden Agri Resources Ltd (GAR).

At the same time, the agency has affirmed SMART's IDR1trn bonds due in 2017 and 2019 at 'AA(idn)'.

'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.

The Outlook revision follows the increase in GAR's consolidated FFO-adjusted leverage to above 4.0x, the level at which Fitch would consider negative rating action. It is also based on Fitch's view that there will be prolonged pressure on commodity prices, which will keep the company's financial leverage high until 2017. Weak CPO prices and expansion in the downstream business have put pressure on GAR's cash flow generation and financial leverage. In 2015, sales fell by 15% to USD6.5bn, while EBITDA margin remained under pressure at 7.4% (2014: 6.6%). FFO-adjusted leverage was 5.2x at end-2015, while net debt/EBITDA increased to 5.5x at end-2015 (end-2014: 5.2x).

KEY RATING DRIVERS
Higher Working Capital: GAR used more working-capital loans to finance the expansion in downstream capacity. About 40% of GAR's debt in 2015 were revolving company loans. Fitch expects the rise in leverage to be temporary because sales will increase once the expanded downstream capacity is operational and CPO prices recovers slowly, and leverage will decline to below 4x in 2018.

Favourable Operating Profile, Integrated Producer: GAR is the second-largest plantation group in Indonesia in terms of planted area. GAR had 485,606 hectares of planted area as of end-2015, which yielded 2.4 million tonnes of CPO in 2015. About 79% of the planted area is in the prime age. Its large plantation area, good productivity, and expanded downstream capacity allow the group to operate efficiently and provide cash-flow visibility over the medium term.

Strong Linkage: The ratings of SMART, IMT, and SMS are equalised with the credit profile of GAR, reflecting the strong strategic and operating linkages to GAR. These three subsidiaries contribute around 71% and 73% of GAR's consolidated planted area and CPO production, respectively. Furthermore, 77% of SMART's CPO sales, 96% of SMS's and 91% of IMT's are sold through GAR's trading arms and other subsidiaries.

Major Downstream Expansion Completed: GAR has completed most of the expansion of its downstream capacity, with refinery capacity increasing to 4.7 million tonnes per annum (mtpa) at end-2015 from 1.4 mtpa at end-2011. We expect GAR's rate of investment to slow because most of the expansion is completed and it does not plan to acquire more land. In 2015, the company started building a biodiesel facility with annual capacity of 300,000 tonnes.

Good Funding Access: GAR has USD867m of debt maturing in 2017, but we believe its refinancing risk is mitigated by the good access to funding. The company has an established track record in the debt and capital markets and robust relationships with a wide range of banks. In 2015, the company fully repaid and refinanced its convertible bonds. GAR had cash of USD244m, and short-term investments of USD259m as of end-2015, compared with debt maturing within one year of USD231m.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Average selling price of CPO of USD600, USD630, and USD650 in 2016, 2017, and 2018, respectively
- Downstream margin of about 2%
- Capex at USD180m in 2016, in line with management guidance
- Dividend payout rate of 25%

RATING SENSITIVITIES
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Consolidated FFO-adjusted leverage at more than 4x on a sustained basis. Fitch expects leverage will remain high in 2016-2017 but come down to below 4x by end-2018.
- EBITDA margin at less than 8.5% on a sustained basis

Positive: Developments that may, individually or collectively, lead to the Outlook being revised back to Stable:
-FFO-adjusted leverage decreases to below 4.0x and EBITDA margin improves to 8.5%.