Golden Agri-Resources Ltd: SGD Three-Year Senior Unsecured at 5% Guidance Golden Agri-Resources Ltd has announced a new SGD three-year senior unsecured bond at 5% guidance. We provide some credit highlights on the issuer and our comments on the bond pricing. What’s happening? Golden Assets International Investment Pte Ltd, the financing vehicle of Golden Agri-Resources Ltd (GAR), has announced a new SGD three-year senior unsecured note with initial price guidance in the 5% area. Both GAR and the new issue are unrated. In this update, we highlight some key credit considerations and comments on the bond pricing. About Golden Agri-Resources Ltd GAR is one of the largest palm oil plantation companies globally that is headquartered in Singapore. The company is listed on the SGX since 1999 and has a market cap of S$4.97 billion as of 16 Jan 18. GAR operates its businesses through four segments, namely its plantation and palm oil mills, palm and laurics, oilseeds, and others, which comprise of the production and distribution of food and consumer products in China and Indonesia. The company’s integrated operations range from cultivating and harvesting oil palm trees, processing fresh fruit bunches into crude palm oil (CPO) and palm kernel, to downstream processes such as refining CPO to produce industrial and consumer products such as cooking oil, margarine and biodiesel. At the end of September, GAR owns a total planted area of 486,684 ha of palm oil plantations in Indonesia, of which the average age is 16 years. The company is majority-owned by the Widjaja family, who controls 50.35% of the company through Flambo International Ltd. Mr Franky Oesman Widjaja and Mr Muktar Widjaja currently lead the senior executive team as the company’s chairman and chief executive officer, and director and president, respectively. Credit Highlights GAR’s revenue climbed 10.1% YoY to USD 5.58 billion in the nine months ended September, from USD 5.07 billion in 9MFY16. The healthy growth was driven by higher average CPO price and the recovery in palm production. Cost efficiency also improved as the company’s cost of sales rose only 8.8% YoY to USD 4.75 billion in 9M17, while SG&A expenses increased 5.6% to USD642.3m. As a result, GAR’s EBITDA jumped 29.3% YoY to USD508.3m in 9M17 from USD393.0m a year ago. Interest expenses rose 6.7% YoY to USD102.8m from USD96.4m during the same period, due to higher borrowing cost. Overall, the decent performance resulted in the company posting an improved interest coverage ratio (EBIT/interest) of 2.4x in its latest trailing twelve months financial results, compared to 1.7x in 2016.

As at 30 Sep 17, GAR’s total borrowings stood at USD 3.12 billion, of which USD 2.09 billion represents short- term debt, compared to the total debt of USD 3.07 billion in December 2016. According to the company, the increase in total borrowings was for working capital purposes. Cash and cash equivalents dropped 6.6% to USD142.9m from USD153.0m over the same period. As a result, net gearing (net debt/equity) stayed at 0.71x at the end of September (4Q16: 0.71x). However, GAR’s debt-to-EBITDA ratio improved to 5.14x in TTM September 2017 from 5.37x in FY16, due to its stronger earnings in 2017. Overall, we think GAR’s credit metrics look healthy relative to its agriculture peers. As a reference, Wilmar International Ltd and Olam International Ltd, two agribusiness group with bigger market cap than GAR’s, posted a net gearing ratio of 0.91x and 1.79x, respectively. GAR’s liquidity seems tight with the significant amount of borrowings coming due within the next twelve months, against USD 1.44 billion of cash and other liquid working capital. Nevertheless, we think refinancing risk is still manageable, as the company has routinely refinanced or rolled over a relatively large amount of short-term borrowings. In the four years ended 2016, GAR has carried an average of USD 1.48 billion of short-term debt, so we think the company treats these as working capital. On the new bond The new bonds are issued off the issuer’s USD 1.5 billion Medium Term Note Programme, which provides bondholders the option to redeem the bonds at par upon cessation or suspension of trading of the GAR shares, or a change of control event. The latter occurs when any person other than the Widjaja family acquires control of more than 50% the GAR’s voting rights, or the Widjaja family acquires 90% or more of the company’s voting rights.

The initial price guidance (IPG) of 5% represents a 339bps spread over the three-year SGD Swap Offer Rate, as of this writing. We think the pricing provides good value against the existing bonds of Olam, such as the OLAMSP 5.800% 17Jul2019 Corp (SGD) and OLAMSP 4.250% 22Jul2019 Corp (SGD). The two aforementioned bonds are trading at YTMs (ask) of 3.92% and 3.83%, respectively, which translate to 245-254bps spread over SGD swaps. We think the sizeable yield and spread pick-up (~90bps based on the IPG) from the new GAR issue are attractive especially when we consider Olam’s significantly more levered credit profile, notwithstanding the strong ownership factor (the Singapore state investment arm Temasek Holdings holds 53% of the Olam shares).