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President and Group Chief Executive of Sime Darby Berhad, Tan Sri Mohd Bakke Salleh speech during media briefing on Sime Darby Group's Financial Results for the Third Quarter ended 31 March 2015 at Sime Darby Convention Centre, Bukit Kiara. Pix by Azhar Ramli

KUALA LUMPUR: Standard &Poor’s has lowered the credit rating on Sime Darby Bhd from A to negative outlook at A-.

The conglomerate’s acquisition of the palm oil plantation in Papua New Guinea New Britain Palm Oil Ltd (NBPOL), weaker operating cash flows and a weaker ringgit which have raised the company’s debt level were the reasons cited.

"We lowered the ratings because of likely delays and amendments in the implementation of Sime Darby's deleveraging plan that could offset the impact of higher debt from the acquisition of NBPOL,” said S&P’s credit analyst Bertrand Jabouley.

The rating agency also anticipates that the company's capability to generate cash could remain modest over the next 12 months.

“We believe it will be increasingly difficult for the Malaysia-based conglomerate to decisively reduce its leverage and improve its cash flow adequacy over the next 18 months to levels commensurate with our earlier forecasts.“

S&P’s is also lowering the long-term issue rating on the company's senior unsecured notes under its guaranteed medium-term notes program to 'A-' from 'A'.

Sime Darby's reported net debt of RM13.8 billion as of March 31, 2015 exceeded its forecasts while the acquisition of NBPOL pushed up its debt more than anticipated.

“We anticipate that Sime Darby's pace of deleveraging will be much slower than earlier anticipated,” he said, adding that the timing and size of a partial divestiture by Sime Darby, possibly to other investors beside the PNG government, remains uncertain.

The depreciation of the Malaysian ringgit against the U.S. dollar by about 10 per cent since June 30, 2014, has inflated Sime Darby's US dollar-denominated borrowings (about 37 per cent of the company's total debt on that date).

The postponement of the proposed IPO of its automobile business will reduce the pace of recovery in Sime Darby's cash flow adequacy, it noted.

“We had initially factored IPO proceeds in excess of RM2 billion in fiscal 2016. “

Sime Darby's operating performance has been modest so far in the current fiscal year (ending June 2015) it said.

Its EBITDA of RM3.1 billion for the first three quarters of the fiscal year represented only about 60 per cent of its earlier expectations.

"The negative outlook reflects our expectation that Sime Darby's pace of deleveraging could remain slow over the next 12 to 18 months, barring a combination of substantial debt reduction initiatives and stronger free operating cash flows," added Jabouley.

“ We may lower the rating if Sime Darby fails to establish a reliable path to deleveraging, such that the ratio of funds from operations (FFO) to debt does not converge toward 40 per cent in the next 12 to 18 months. “

He said the rating could also come under pressure if Sime Darby's earnings concentration increases, such that the plantation division accounts for substantially more than a half of total EBITDA on a sustained basis.

However the outlook may be revised if Sime Darby has communicated and started to implement a credible plan to markedly reduce its debt.

A ratio of FFO to debt exceeding 40 per cent on a sustainable basis would indicate such improvement.

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