KUALA LUMPUR: Moody's has placed plantation giant IOI Corporation Bhd for a downgrade in ratings.
This follows uncertainty about its operating performance, particularly on its downstream business, after its entire oil palm production was suspended by the Roundtable on Sustainable Palm Oil (RSPO) and the subsequent announcements by several customers.
The review wil be for the Baa2 issuer rating of IOI Corp, its senior unsecured bond rating of IOI Investment (L) Bhd and Baa2 senior unsecured bank credit facility rating of IOI Ventures (L) Bhd.
RSPO suspended the certification on April 4 for all of IOI's oil palm production after receiving complaints by a non-governmental organisation on non-compliance of IOI's Indonesia plantation — which produced approximately 2 per cent of the company's annual crude palm oil (CPO) production.
Unilever PLC, Kellogg Company, Mars Inc and Nestle S.A. announced that they would not cooperate with IOI.
IOI has submitted an action plan to RSPO, which it believes will help resolve the complaints.
However, the time frame for the resolution remains uncertain and Moody's notes that some plantation companies have required more than a year to satisfy RSPO's complaints.
"While potential sales losses from IOI's inability to supply certified palm oil are not quantifiable at this point due to ongoing developments with RSPO and its customers, we note that the company's earnings could deteriorate significantly, which could in turn pressure its financial metrics, if the suspension is not resolved within a year," says senior analyst Jacintha Poh.
In such scenarios, Moody's expects IOI's downstream business to be severely impacted, particularly for customers in Europe and the USA, who might switch to other suppliers in order to comply with their policies on environmental sustainability.
As this is IOI's second suspension within a five-year timeframe, Moody's also expects IOI to suffer reputational damage, which may result in a further loss of customers.
Moody's however expects IOI's operating profit for its fiscal year ending 30 June 2016 to remain broadly stable.
Its review will focus on IOI's measures to resolve its suspension by RSPO on a timely basis, strategy to manage its business with the ability to retain its customers during the suspension period, continued maintenance of a sizeable liquid assets base; and pro-active refinancing of its short-term debt maturities.