F

itch Ratings has affirmed the National Long-Term Ratings of Indonesia-based palm oil producers PT Sinar Mas Agro Resources and Technology (SMART), PT Ivo Mas Tunggal (IMT) and PT Sawit Mas Sejahtera (SMS) at AA(idn), and revised their outlooks to stable from positive.

SMART, IMT and SMS are wholly owned by Golden Agri Resources Ltd. (GAR). The agency has also affirmed SMART'€™s Rp 3 trillion (US$260 million) bond program and its Rp 1 trillion bonds due in 2017 and 2019 issued under the program at AA(idn).

The rating assigned to the bond program is no assurance that bonds issued under the program will be assigned a rating, or that the rating assigned to a specific issue will be the same as that of the program.

'€œAA'€ National Ratings denote expectations of a 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 rating agency said the ratings on SMART, IMT and SMS reflected their strong linkage and strategic importance to GAR. Combined, these companies account for over 70 percent of GAR'€™s planted area and annual crude palm oil (CPO) production, which means that the absence of any of these subsidiaries will directly impair GAR'€™s overall profile.

The outlook revision also reflects Fitch'€™s view that significant improvements in GAR'€™s consolidated financial profiles are not anticipated over the medium-term, and that the headroom for rating upgrades for the rated subsidiaries has diminished.

GAR'€™s funds from operation (FFO)-adjusted leverage increased to 4.6x at end-2013 from 3.5x at the end of 2012, driven by lower CPO prices and plantation productivity, coupled with higher working capital requirement from both downstream and trading activities. '€œThis is in contrast to our initial expectation that GAR would be able to begin to deleverage from 2013, which underpinned the Positive Outlook,'€ Fitch said a statement.

While leverage is expected to be higher than previous, GAR'€™s position as the world'€™s second-largest palm oil producer by planted area and the contributor of almost 10 percent of Indonesia'€™s total annual CPO production supports the ratings.

GAR also has a favorable plantation profile, with 47 percent of the planted portfolio at prime mature age and its productivity metrics among the highest in the industry.

The group'€™s growing downstream capacity also provides margin stability through commodity cycles, while logistics and trading platforms are expected to improve its competitive position over time. The group'€™s consolidated CPO cash costs increased by about 7 percent year-on-year (y-o-y), primarily due to lower plantation productivity and higher labor costs. At the same time, global CPO prices were low during 2013 and downstream sales and trading accounted for a bigger proportion of consolidated sales at about 41 percent (2012: 37 percent).