Standard & Poor's Ratings Services raised its long-term corporate credit rating on Indonesia-based cocoa processor PT Davomas Abadi Tbk. to CCC+ from D. The outlook is negative.
At the same time, S&P assigned CCC+ issue rating to the company's US$119 million variable rate guaranteed senior secured notes due December 2014 and also withdrew the D issue rating on the US$238 million 11% guaranteed senior secured notes bonds due in 2011 as these were exchanged for the 2014 notes. Both bonds were issued by Davomas International Finance Co. Ltd. and are guaranteed by Davomas.
"We raised the ratings to reflect our view that Davomas' liquidity risks have reduced for at least the next 12 months following a decrease in the coupon rate of its notes due 2014 to 5.5% for the first year of issuance. In addition, the company has the option to meet coupon payments in kind through the issue of new notes with a coupon rate of 13.75%," said Standard & Poor's credit analyst Wee Khim Loy.
"We raised the ratings to reflect our view that Davomas' liquidity risks have reduced for at least the next 12 months following a decrease in the coupon rate of its notes due 2014 to 5.5% for the first year of issuance. In addition, the company has the option to meet coupon payments in kind through the issue of new notes with a coupon rate of 13.75%," said Standard & Poor's credit analyst Wee Khim Loy.
"The rating on Davomas also reflects the risks of operating in a single site in Tangerang, West Java, a limited product range and high customer concentration risk, where the top five customers account for more than 70% of total revenue."
The lower coupon rate and the payment-in-kind option are available only in the first year of issue, i.e. in 2010. In subsequent years, the coupon rate would increase to 11%, the same rate as the old notes.
The lower coupon rate and the payment-in-kind option are available only in the first year of issue, i.e. in 2010. In subsequent years, the coupon rate would increase to 11%, the same rate as the old notes.
As a part of the restructuring exercise, the company also received an interest-free shareholders' loan of US$33 million in November 2009, which it plans to use for working capital. Following the completion of the exchange offer in December 2009, Davomas' debt levels decreased to US$119 million from US$238 million and the maturity profile lengthened to December 2014.
Davomas' operating environment is improving but remains weak. The company shut down its operations in May 2009 following sluggish demand for cocoa products in its main markets of the U.S. and Europe. With the global economy showing signs of recovery and an improvement in the prices of cocoa products, the company restarted its production facilities in November 2009, but it is still operating at less than its average capacity of more than 80% in 2007.
Davomas' operating environment is improving but remains weak. The company shut down its operations in May 2009 following sluggish demand for cocoa products in its main markets of the U.S. and Europe. With the global economy showing signs of recovery and an improvement in the prices of cocoa products, the company restarted its production facilities in November 2009, but it is still operating at less than its average capacity of more than 80% in 2007.
Although the prices of cocoa butter and cocoa powder should improve significantly in 2010, we expect the company to operate at less than 70% capacity this year, given high raw material prices and limited financial flexibility. Despite lower debt levels, we expect Davomas' financial risk profile to remain highly leveraged in 2010 with ratios of debt to EBITDA and debt to capitalization likely to exceed 5x and 60%, respectively.
"The negative outlook on the rating reflects Standard & Poor's expectation that Davomas' operating performance will remain challenging and vulnerable to volatile cocoa bean prices. In addition we expect the company to maintain a highly leveraged financial risk profile and limited financial flexibility," said Ms. Loy.
"The negative outlook on the rating reflects Standard & Poor's expectation that Davomas' operating performance will remain challenging and vulnerable to volatile cocoa bean prices. In addition we expect the company to maintain a highly leveraged financial risk profile and limited financial flexibility," said Ms. Loy.
"The likelihood is also limited that the rating will be raised in the near term.The rating is likely to be lowered if the company is unable to maintain adequate liquidity to meet its future coupon payments or is unable to improve its operating performance, resulting in further depletion of its cash balance."
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