KUALA LUMPUR: MARC Ratings has turned negative on the ratings outlook for cocoa grinders Guan Chong Bhd (AA-IS) and JB Cocoa Sdn Bhd (A+IS) sukuk programmes on the spike in cocoa bean prices.
The ratings agency said cocoa bean prices have risen steeply from US$3,835 per tonne to US$9,193 per tonne between end-October 2023 and end-March 2024, weighing sharply on the working capital requirement of Guan Chong and JB Cocoa.
"This could lead to a sharp increase in their borrowing levels, with leverage positions potentially increasing to above 1.5 times," it added.
MARC also said the recent adverse weather conditions, exacerbated by the El Niño effect, have severely impacted cocoa bean production, particularly in key cocoa-producing countries, Côte d'Ivoire and Ghana, which account for 60 per cent of global production.
It noted that the International Cocoa Organisation estimates a supply deficit of 374,000 tonne for the current 2023/2024 crop year (ending Sept 30, 2024), compared to a deficit of 74,000 tonne in the previous corresponding period.
Cocoa production is expected to decline by 10.9 per cent year-on-year (YoY) to 4.45 million tonne for the current crop year.
According to MARC, while price is projected to trend downwards over the near term from the peak of US$10,080 per tonne recorded on March 26, it is still expected to hover at an elevated level, higher than the US$3,000 per tonne prior to the commencement of the price escalation.
"MARC Ratings understands that Guan Chong and JB Cocoa are procuring beans from other countries in West Africa, Ecuador and Indonesia to be able to fulfil their supply contracts with minimal impact on their operations and cash flow generation as of date.
"They have also put in place mitigation plans to shore up their financial position including strengthening their balance sheets," it said.
Notwithstanding these initiatives, MARC remains concerned about the impact on the credit profile of the cocoa grinders from a prolonged supply-demand dislocation due to the high cocoa bean price environment.
It will undertake a full assessment on both issuers in the next few months.
MARC said upon the conclusion of its rating review, any rating action will consider, among other factors, the effectiveness of measures that have been put in place to withstand the current challenges.
It noted that the rating outlook could be revised back to stable if the impact on credit profiles from the change in cocoa industry dynamics is well mitigated.