Global ratings agency Fitch Ratings cut its outlook on three Indonesian palm oil companies - Sinar Mas Agro Resources and Technology (SMART), Ivo Mas Tungkal, and Sawit Mas Sejahtera - from stable to negative. The rating of the three companies was cut to AA (idn) by Fitch Ratings Indonesia. However, an AA (idn) rating still denotes a low probability of default for the company and its bonds. The rating of bonds of SMAR, due in 2017 and 2019, were also cut to AA (idn). The three palm oil companies are owned by Golden Agri Resources, part of the Sinar Mas Group that is controlled by Eka Tjipta Widjaja, one of the richest Indonesians.
Fitch Ratings lowered the outlook on the three Indonesian palm oil companies because their parent company - Golden Agri Resources - saw its leverage ratio rise considerably (meaning higher debt relative to its assets) amid the low global palm oil price. Fitch Ratings stated that palm oil prices may remain under pressure until 2017. Besides low commodity prices, Fitch Ratings also detects pressures on Golden Agri Resources' cash flow and leverage ratio due to the company's investment in the development of downstream activities. Regarding the palm oil industry, the downstream sector is not expected to boost the profitability of the company because a large portion of Indonesia's palm oil refinery capacity remains underutilized due to weak demand. It is estimated that the utilization rate of Golden Agri Resources' palm oil and oleo-chemical refineries stands at around 60 percent, while a ratio of at least 70 percent is needed to cover operational costs.
In 2015 Golden Agri Resources saw its net sales decline by 15 percent year-on-year (y/y) to USD $6.5 billion. Meanwhile, its net debt-to-EBITDA rose from 5.2 times to 5.5 times over the same period. Throughout the key palm oil producing regions of Sumatra and Kalimantan, production has been impacted by the El Nino weather phenomenon. Output of fresh fruit bunches at Golden Agri Resources is estimated to decline by 8 - 10 percent (y/y). Although the palm oil price has been on a rising trend recently, it is probably not enough to offset the negative impact of lower production. Moreover, if the rupiah continues to appreciate against the US dollar, then the debt-servicing capacity of Golden Agri Resources is estimated to weaken.