PT Japfa Comfeed Indonesia Rating Placed On CreditWatch Positive On Prospective Refinancing, Lengthened Debt Maturities

Stocks and Financial Services Press Releases Monday March 20, 2017 17:38
SINGAPORE--20 Mar--S&P Global Ratings

SINGAPORE (S&P Global Ratings) March 20, 2017--S&P Global Ratings placed its 'B+' long-term corporate credit rating and our 'axBB' long-term ASEAN regional scale on PT Japfa Comfeed Indonesia Tbk. on CreditWatch with positive implications. At the same time, we placed our 'B+' issue rating on PT Japfa's guaranteed senior debts on CreditWatch with positive implications. We also assigned our preliminary 'BB-' long-term foreign currency issue rating to PT Japfa's proposed issuance of U.S. dollar-denominated senior unsecured notes due 2022. The company is an Indonesia-based producer of animal feed and poultry.

"We placed the ratings on CreditWatch because PT Japfa's proposed partial refinancing of its U.S. dollar bond due May 2018 should lengthen its debt maturity profile and reduce refinancing risk," said S&P Global Ratings credit analyst Eric Nietsch.

While PT Japfa has not yet finalized the amount of the proposed issuance due 2022, we expect the transaction size to contribute materially towards the refinancing of about US$200 million of outstanding U.S. dollar bonds maturing 2018. We also believe the company will have sufficient funding alternatives to call its remaining bonds, given: (1) about Indonesian rupiah (IDR) 1.2 trillion in cash on hand as of Dec. 31, 2016 (excluding IDR1.5 trillion in cash that the company used in January 2017 to repay maturing rupiah-denominated bonds); (2) operating cash flows that we estimate at over IDR1.0 trillion over the next 12 months; and (3) access to domestic bond and

bank loan markets.

We now estimate that PT Japfa's weighted average maturity will be nearly four years, compared with less than two years for the quarter ended Sept. 30, 2016. This longer debt maturity profile would be indicative of a higher rating level. PT Japfa's completion of its proposed refinancing plan follows several recent refinancing exercises. The company's short-term debt fell to IDR760 billion as of Dec. 31, 2016, a sharp drop from IDR1.86 trillion a year earlier. The short-term debt excludes an IDR1.5 trillion domestic bond maturing in January 2017 that the company has already refinanced with

maturities in late 2019 and 2021.

PT Japfa's proposed refinancing is also taking place amid a generally more favorable industry environment. The demand-and-supply balance has marginally improved, while commodity prices are still low, the rupiah is marginally stronger, and the company's capital spending and debt levels are reducing. As a result, PT Japfa's cash flow adequacy and leverage ratios have strengthened since their lows of 2014. We estimate that PT Japfa's ratio of funds from operations (FFO) to debt was about 50% in 2016, compared with 13% in 2014. Even under a scenario of a moderate erosion of operating margins in the next 12 months, we project the ratio of FFO to debt to remain steady at 35%-45% over the next two years, with FFO interest coverage of 4.0x-5.5x.

The consolidated debt maturity profile, operating performance, cash flow adequacy, and debt servicing ratios at Japfa Ltd., which owns 51% of PT Japfa, have improved in tandem with the improvements at PT Japfa. Consolidated EBITDA margins at the parent grew to about 14% for the year ended Dec. 31, 2016, compared with about 11% in 2015. The ratio of gross debt to EBITDA also improved to about 2.2x from 2.9x over the same period. Given the moderate double leverage at Japfa Ltd., consolidated cash flow adequacy and leverage ratios at the parent are broadly in line with that of PT Japfa.

The 'BB-' preliminary rating on PT Japfa's proposed notes reflects the likelihood that we would raise our corporate credit rating on the company to

'BB-' if the bond issuance is successful. The final rating on the proposed notes would depend upon the receipt and satisfactory review of all final transaction documentation, including terms and conditions, covenants, and transaction size. Accordingly, the preliminary rating should not be construed

as the final ratings. If S&P Global Ratings does not receive final documentation within a reasonable time frame, or if final documentation departs from materials reviewed, S&P Global Ratings reserves the right to withdraw or revise its ratings.

The rating on PT Japfa reflects the company's position as the second-largest operator in Indonesia's poultry feed and breeding sector. This is a solid and sustainable position in an industry that we believe has favorable long-term growth prospects. These strengths are tempered by PT Japfa's high geographic and product concentration, as well as margin sensitivity to volatile raw material prices and currency fluctuations.

We expect to resolve the CreditWatch status when PT Japfa's refinancing initiative closes, which we expect by the end of March 2017.
We will raise the rating on PT Japfa by one notch to 'BB-' after the issuance.

We may affirm the rating if PT Japfa cancels its bond refinancing initiative, or if the amount raised by the company is significantly larger than we have incorporated in our base-case assumptions, such that leverage increases rather   than decreases.


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