OREANDA-NEWS. S&P Global Ratings said today that it had revised its outlook on PT Japfa Comfeed Indonesia Tbk. (PT Japfa) to stable from negative. At the same time, we affirmed our 'B' long-term corporate credit rating on the company. We also affirmed our 'B' long-term issue rating on the senior unsecured notes that PT Japfa guarantees. In line with the outlook revision, we raised our long-term ASEAN regional scale rating on the Indonesia-based poultry feed and commercial farming company to 'axBB-' from 'axB+'.

"We revised the outlook because PT Japfa has articulated a credible strategy to address the refinancing risk associated with its 2017 debt maturities," said S&P Global Ratings credit analyst Eric Nietsch.

PT Japfa's liquidity has improved and its refinancing risk has reduced following a sale of equity to KKR & Co. (KKR). The transaction closed Aug. 4, 2016. KKR now owns about 12% of PT Japfa, and PT Japfa has already received the proceeds of about Indonesian rupiah (IDR) 700 billion. We believe PT Japfa is committed to using most of the equity proceeds, over which it has discretion, to repay its debt. Also, PT Japfa is in advanced stages of setting up bank facilities totaling IDR1 trillion. We expect the company to use both these funding sources to repay investment debt maturing within the next 12 months, mostly IDR1.5 trillion in domestic bonds maturing in the first quarter of 2017.

PT Japfa is yet to articulate its refinancing plans for its U. S. dollar notes maturing in 2018. Nevertheless, we expect the company to work with KKR to address the overall capital structure, even though it is a minority holder.

PT Japfa's articulation of a credible refinancing strategy for its 2017 maturing debts also coincides with a sharp turnaround in its operating performance. The company reported EBITDA of about IDR1.7 trillion for the six months ended June 30, 2016. This represents more than 70% of our earlier forecast for 2016 and is higher than EBITDA of about IDR600 billion the company reported in the same period in 2015. Operating margins benefitted from a stronger rupiah (which reduced the cost of imported raw materials), still-low raw material prices, and normalizing margins in the day-old chick and commercial farming segments. Reported EBITDA for full-year 2016 will likely exceed IDR2 trillion, a multi-year high.

PT Japfa's capital structure has also improved following more supportive operating conditions, the equity issuance, and reduced capital spending. Reported net debt was IDR5.95 trillion as of June 30, 2016, before receipts from the equity issuance. This compares with more than IDR6.5 trillion in 2014. Our revised projections now contemplate positive discretionary cash flows of about IDR25 billion in 2016, rising to almost IDR200 billion in 2017 if capital expenditure remains around IDR750 billion annually. Amid cash accumulation and reducing net debt, PT Japfa's ratio of funds from operations (FFO) to debt could exceed 20% in 2017 if operating conditions remain favorable and spending moderate.

We affirmed the ratings to reflect PT Japfa's improved, but still lumpy, debt maturity profile and foreign-currency mismatch between debt and cash flows. The company also maintains a solid market position and competitive advantage as the second-largest integrated poultry operator in Indonesia, an oligopolistic market.

"The stable outlook reflects PT Japfa's reduced refinancing risk related to its maturing debts," said Mr. Nietsch. "It also reflects the prospect that the company's FFO interest coverage will stay above 3.0x over the next 12 months amid more favorable operating conditions."

We could downgrade PT Japfa if the company fails to articulate a credible refinancing strategy for the remaining lumpy debt maturities, especially its U. S. dollar notes, within the next 12 months.

We could also lower the rating if we assess the credit quality of Japfa Ltd., PT Japfa's majority shareholder to have weakened. Given PT Japfa's large contribution to the parent's consolidated revenues and EBITDA, we could lower the group credit profile if PT Japfa's FFO interest coverage falls below 3x on a sustained basis. This could materialize if the Indonesia operations weaken, PT Japfa's EBITDA margin falls below 7.0%, and the company pursues expansionary capital spending.

We could raise the rating if PT Japfa has articulated and started to implement a credible strategy to lengthen its debt maturity profile. An upgrade would hinge on operating conditions improving sustainably and the company managing its capital spending such that the ratio of FFO to debt stays above 20% on a sustained basis.