Here's what Golden Agri's planned issue of USD400m bonds will do to its leverage

Fitch says leverage will increase but will still be manageable over the next two years.

In a release, Fitch Ratings says that Singapore-listed Golden Agri Resources Ltd's (GAR) leverage will increase as a result of its planned issue of USD400m 2017 convertible bonds but should remain manageable over the next two years.

Fitch is therefore of the view that GAR's proposed bonds will not impact the ratings of its Indonesian plantation subsidiaries, which are driven by their strong linkage to GAR. A full rating breakdown is provided below.

The bond issue will weaken GAR's funds from operation (FFO) adjusted leverage to 2.0x by end-2012 and 3.4x in 2013, from 1.5x in 2011, based ondeclining crude palm oil price assumptions. While this is higher than Fitch's negative rating trigger of 2.5x, the agency believes FFO-adjusted leverage will gradually improve below 2.5x in 2014 as free cash flow (FCF) is used to meet scheduled debt amortisations. Over the longer-term, leverage should remain below 2.5x as GAR ramps up its downstream operations with higher plantation output.

Fitch expects medium-term cash flows from its matured plantation profiles to provide comfortable headroom for additional debt. On a net basis, the agency expects GAR's FFO-adjusted leverage to be below 2x over the forecast period which Fitch considers acceptable given the group's expansion plans.

GAR plans to use the bond proceeds for general corporate purposes, including acquisitions or joint ventures when the opportunity arises. Fitch notes that this is in line with similar expansion moves by other Indonesian palm oil companies, in response to the growth potential of the country's palm oil industry. The proposed issue will strengthen GAR's liquidity and its resources for potential investments.

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