The Chain: IOI threatened by possible Moody’s downgrade

In response to IOI Corporation’s (IOI:MK) decision to sue the Roundtable on Sustainable Palm Oil (RSPO) last week, several major global corporations, such as Unilever, Mars, Nestle, Kelloggs, and Ferrero have stopped buying from the company.

IOI was temporarily suspended from RSPO after its failure to resolve issues related to deforestation and land grabbing in violation to RSPO’s policies. With IOI now currently unable to sell certified sustainable palm oil (CSPO) in Europe, European CSPO markets are forecasted to experience supply chain disruptions.

IOI owns the largest palm oil refinery in Europe, located in Rotterdam, Holland. The Rotterdam facility also permits the company to have direct exposure via pipelines to the Finnish biofuel producer Neste Oil. Neste Oil had in the past temporarily stopped purchases from IOI Corporation because of RSPO non-compliance issues, and they did so again in April of this year following the RSPO suspension. Notably, Neste Oil was prepared ahead of time with other feedstocks replacing IOI’s palm oil, and they have already replaced IOI’s contract with other suppliers.

Finally, in what could be the most long-term significant impact of the suspension and lawsuit, Moody’s has placed IOI “on review for downgrade” from Baa2 to Baa3. Baa3 is one notch above “speculative”. Baa3 is the lowest possible rating for a company to maintain and still be labeled “investment-grade.” If IOI were to be rated “speculative-grade”, many global institutional investors would be prevented from investing in IOI as these same investors’ investment policy statements may prohibit investing in equity and debt positions from “speculative-grade” companies.

Moody’s stated:

“The review for downgrade was driven by uncertainty regarding IOI’s operating performance, particularly on its downstream business, after its entire oil palm production was suspended by the Roundtable on Sustainable Palm Oil (RSPO) and the resultant announcement by several of its customers to cease cooperation with the company,” says Jacintha Poh, a Moody’s Vice President and Senior Analyst.

Many of the NGOs, advocates and analysts watching the unfolding IOI story still hope the company can change course, and end the storm of its own making. Twenty-two global NGOs signed a letter asking for IOI to resolve outstanding issues, and transform the company into a global sustainability leader. To do so would entail addressing reputation and business risks by employing firm-wide operational risk mandates based on sound sustainability principles and criteria.