Nov 10, 2011

S&P upgrades BSP rating to CCC+

Standard & Poor's Ratings Services (S&P) said today that it had raised its long-term corporate credit rating on Indonesia-based plantation company PT Bakrie Sumatera Plantations Tbk. (BSP) to CCC+ from CC. The outlook is negative. We removed the rating from CreditWatch, where it had been placed with positive implications on Nov. 1, 2011.
"We raised the rating on BSP because we believe the pressure on the company's liquidity has temporarily eased after it refinanced its US$185 million senior secured notes due Nov. 1, 2011," said Standard & Poor's credit analyst Vishal Kulkarni, in a press statement yesterday.
"We expect BSP to maintain its vulnerable business risk profile and highly leveraged financial risk profile."
The rating on BSP reflects the company's sizable debt maturities in the next 12 months and weak operating efficiency." 
The rating also reflects the volatility in BSP's earnings due to its exposure to the cyclicality in the prices of crude palm oil (CPO) and rubber. We expect the demand for CPO to remain steady over the next one to two years. The steady demand for CPO and the commencement of BSP's downstream facilities partly offset the weaknesses. The BSP management's established record and experience in the plantation business underpin the rating.
"We assess BSP and its 99.02% owned subsidiary Agri International Resources Pte. Ltd. (CCC+/Negative/--) as a consolidated  entity. We expect BSP to put in place a plan to refinance Agri International's US$150 million senior secured notes due July  2012, even though it does not guarantee the notes."
BSP's weak operating profile and high debt stemming from recent acquisitions have resulted in fragile cash flow protection measures. In addition, cyclical and volatile CPO prices have led to unpredictable earnings and cash flows for the company. 
"Nevertheless, BSP will continue to benefit from high CPO and rubber prices over one to two years. In addition, we expect BSP's acquisition of Indonesia-based oleo chemicals producer Domba Mas in 2010 to help stabilize the company's cash flows, because the prices of oleo chemicals are generally less volatile than the prices of CPO."
S&P view, BSP's liquidity is weak. The company's ratio of sources of liquidity to uses of liquidity is about 0.7x, where S&P expects it will remain in 2012 and 2013. S&P expects BSP's debt servicing burden to be higher starting 2012 because of the amortizing nature of most of the debt at the company and at Domba Mas.
"The negative outlook on BSP reflects our expectation that the company's liquidity will remain weak because of: (1) significant debt maturing in the next 12 months; and (2) higher debt servicing needs due to the amortizing nature of most of its debt," said Mr. Kulkarni.
S&P may lower the rating if BSP in unable to come up with a plan to refinance Agri International's notes in the next 6 months.
Given the absence of a cross-default clause between BSP and Agri International, a default by Agri International may not necessarily lead to a default by BSP. But such a situation would likely constrain BSP's access to funding sources and put pressure on the ratings.
We could revise the outlook to stable if BSP maintains adequate liquidity and complies with its loan covenants.
Disclosure: No position at the stock mentioned above.

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