11/1/07 (The Edge News)  - Rating Agency Malaysia Bhd has revised its long-term price assumption for crude palm oil (CPO) in the rating of commercial-real-estate-backed (CREB) transactions involving oil-palm plantations.

"The price assumption has been revised upwards by 16% to RM1,200 per tonne, reflecting the change in RAM’s outlook on this sector," the rating agency said on Jan 12.

It said the revision was prompted by the structural changes that have been taking place in the global palm-oil industry over the last two years, which support our view of more stable and robust CPO prices compared to the historical price trends.

With the change in RAM’s base CPO price assumption for CREB assets in this sector, there will be a positive rating impact on the sustainable valuation model employed in rating such transactions.

Nonetheless, the significance and extent of the rating change will depend on the performance of the plantation assets relative to their cost management.

In assessing the impact on the ratings, RAM will also take into consideration the respective loan-to-value (LTV) ratios and debt-service coverage ratios required for each rating level.

In reviewing the long-term CPO price assumption used in RAM’s valuation model, several key developments affecting global demand for CPO had been taken into consideration:

* China’s growing demand for CPO, which is expected to offset some of the negative price effects from India’s agricultural tariff structure;

* Recent developments and policy trends as well as progress in the production of CPO-based biodiesel vis-a-vis escalating crude-oil prices and alternative edible oils; and

* to a smaller extent – greater health awareness concerning the use of harmful trans-fatty acids.

RAM believes that all these factors will help reduce fluctuations in CPO prices and create greater support against adverse movements in commodity prices.

As it is, CPO prices have been rising steadily over the past few months, and are expected to close the year within the range of RM1,700 per tonne - RM2,000 tonne.