Jan 14, 2011

Bakrie Plantations downgraded to Caa1

International rating agency, Moody’s Investors Service has lowered the corporate family and secured bond rating of PT Bakrie Sumatera Plantations Tbk from B3 to Caa1 with negative outlook, citing the rising debt leverage of the company.
Vice President& Senior Credit Officer Moody’s Alan Greene in a press release published yesterday said that the downgrade action was triggered by refinancing requirements and financial reporting restatements of Bakrie Plantations (UNSP-coded stock).
“The downgrade reflects two main challenges facing Bakrie Sumatera Plantations –the high level leverage following the acquisition of the Domba Mas businesses, despite a large rights issue of US$520 million in early 2010, and heightened liquidity risk from maturing debt," said Alan Greene.
He saw Bakrie Sumatera Plantation needs to obtain new funds before November 2011 when its existing bonds of US$160 million mature.
Furthermore, as he said, even if funds are raised to cover November's debt maturity, another debt payment looms in July 2012, in the form of a US$150 million bond issued by its subsidiary, Agri International.
Meanwhile progress towards resolving the concerns that led to the review, such as the bond refinancing, the assimilation of Domba Mas, and the level of disclosure and transparency, has been limited.
Moody's has included Domba Mas in the assessment of Bakrie Sumatera Plantation's debt leverage although the operational of Domba Mas is still separated from Bakrie.
However, the operating linkages between Bakrie Plantations and Domba Mas will increasingly strengthen, although the chemical business will still require significant market crude palm oil in addition to Bakrie Plantation's output.
The rating outlook of Bakrie Plantations is still set at the negative level. Greene also said the downgrade also concludes the review for possible downgrade initiated on September 27, 2010.
The rating outlook could return to stable if Bakrie Plantations can demonstrate it has successfully raise funds to address its maturing debts in 2011 and 2012.
Furthermore, the company has to show improvement to its debt leverage, debt/EBITDA within a range of 5.5 times to 6.0 times.
Rating downgrade pressure could emerge if there is a further deterioration in Bakrie Plantation's liquidity position or no further real progress in addressing its maturing debt. 

Disclosure: No position at the stock mentioned above.

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