KUALA LUMPUR (April 9): The sharp rise in cocoa bean prices could lead to higher borrowing and leverage for cocoa grinders Guan Chong Bhd and JB Cocoa Sdn Bhd, a wholly-owned subsidiary of Singapore's JB Foods, according to MARC Ratings.

In a statement on Tuesday, MARC said it has downgraded its rating on the sukuk programmes of both companies from “stable” to “negative”.

The rating agency said the revised rating was prompted by the significant increase in cocoa bean prices, from US$3,835 to US$9,193 per tonne between October 2023 and March 2024, putting considerable pressure on the working capital needs of both companies.

"This could lead to a sharp increase in their borrowing levels, with leverage positions potentially increasing to above 1.5 times," it said.

Although cocoa prices are forecasted to decline from the recent peak of US$10,080 per tonne recorded in March 2024, MARC anticipates the prices to remain elevated compared to pre-escalation levels of US$3,000 per tonne.

The rating agency noted that Guan Chong and JB Cocoa have been sourcing beans from other regions like West Africa, Ecuador and Indonesia to fulfil supply contracts with minimal disruption to operations and cash flow, and have implemented strategies to strengthen their financial positions, including bolstering their balance sheets.

"Notwithstanding these initiatives, we remain concerned about the impact on the credit profile of the cocoa grinders from a prolonged supply-demand dislocation due to the high cocoa bean price environment," it said.

MARC said it will undertake a full assessment of both issuers in the next few months, and upon the conclusion of the rating reviews, any rating action adjustments will consider the effectiveness of implemented measures in mitigating current challenges.

It added that the rating outlook could be revised back to “stable” if the impact on credit profiles from the change in cocoa industry dynamics is well mitigated.

Shares in Guan Chong closed three sen or 1.18% lower to RM2.51 on Tuesday, giving the group a market capitalisation of RM2.95 billion.