Bakrie Plantations rating downgraded to 'B

Standard & Poor's Ratings Services last week lowered its long-term corporate credit rating on Indonesia-based plantation company PT Bakrie Sumatera Plantations Tbk. (BSP) to 'B-' from 'B'. The outlook is negative. At the same time, Standard & Poor's lowered the rating on the senior secured bonds due in 2011 to B- from B. These bonds were issued by BSP Finance B.V. and are guaranteed by BSP.
The downgrade reflects our expectation that the liquidity position of BSP's subsidiary, Agri International (CCC+/Negative/--), will become further strained and it is likely to weaken BSP group's credit profile.
"We anticipate that Agri International's funds from operation (FFO) will be low in the next one year due to lower production volume and yield performance. This will pressure its liquidity on the back of its limited cash and heavy debt burden," said Standard & Poor's credit analyst Yasmin Wirjawan.
BSP does not consolidate Agri International in its financial statement accounts because its holding of 51% is through direct and indirect ownership. However, Standard & Poor's takes a consolidated view to include Agri International when analyzing the credit profile of BSP, given its significant asset size, high debt level as well as BSP's offtake commitment and management control.
The rating on BSP reflects the company's aggressive expansion program, weak cash flow measures, and exposure to crude palm oil (CPO) and rubber prices. CPO and rubber prices are cyclical and subject to volatility, resulting in some unpredictability in earnings and cash flows.
These risks are offset by steady demand for CPO, which is likely to continue in the near to medium term and BSP's established track record and management experience in the plantation business.
"The negative rating outlook on BSP reflects our expectation that Agri International's liquidity could erode further due to limited internal cash generation over the next year," Ms. Wirjawan said.