Golden Agri raised millions for downstream expansion: Moody's

It might also invest in logistics and operations upgrades, and planting.

The assessment was made after Moody's announced in tandem with an upgrade of the corporate family rating, including a warning that margin dilution may worsen and working capital levels rise to new heights.

Here's more from Moody's:

"The upgrade is supported by the continued strength of Golden Agri's operations and resultant credit profile, and its resilience through the global financial crisis. While commodity price volatility is always a concern, we draw comfort from palm oil's competitiveness as a vegetable oil and the growing global demand for vegetable oils and their derived consumer products, chemicals and fuels," says Alan Greene, a Moody's Vice President and Senior Credit Officer.

Palm oil plantations are confined to tropical areas and Indonesia and Malaysia produce approximately 90% of the world's supply of crude palm oil (CPO). As the largest CPO producer in Indonesia and the third largest in the world, Golden Agri is very well placed to benefit from the industry's fundamentals. In addition to its existing planted area of 457,000 ha as at 1H 2012 and a favorable plantations maturity profile, the company also boasts a land bank of approximately 100,000 ha, which is sufficient for 3 to 4 years of organic expansion.

The proposed five year convertible bond (with a three year put/call) launched yesterday together with the IDR3 trillion bond programme announced by its subsidiary, PT SMART Tbk, in June, should put the debt maturity profile on to a sounder footing.

Coupled with the recent exercise of equity warrants, which raised SGD377 million, the company has significant funds on hand. Moody's expects the funds to be spent on enlarging the group's downstream operations and improving its logistics capability to capture more contribution from along the CPO business chain. At the same time it will support on-going planting programmes,  including in Africa, where it holds an interest in a 220,000ha plantation development in Liberia.

Within the rating, the weighting attributable to Golden Agri's association with the default of Asia Pulp & Paper group ("APP"), an affiliate held by Golden Agri's main shareholder, and by its own debt rescheduling, has diminished. At the same time, Golden Agri has worked at improving its environmental credentials with respect to rainforest conservation and palm oil sustainability. However, overall Indonesian institutional risk remains. Golden Agri is part of the Sinar Mas group, the name of the Widjaja family's business empire.

"Moody's will continue to monitor Golden Agri's CSR performance including transactions with related parties. The corporate governance concerns also translate into more stringent expectations towards the company's credit profile," adds Greene, also Moody's Lead Analyst for Golden Agri.

The stable outlook is based on Moody's expectation that Golden Agri maintains its strong market position in CPO through continued effective plantation management, and that CPO prices remain supportive and within the range of their 5-year average of around $850. It also anticipates successful implementation of its accelerated growth plans and no re-emergence of CSR issues.

Some dilution of margin and an increase in working capital levels is expected from the increased investment into processing and logistics facilities.