standard & poor's rating

May 2, 2011--Standard & Poor's Ratings Services today said that it had assigned its 'B' corporate credit rating to TFS Corp. Ltd. (TFS), an Australian-based forestry company that operates vertically integrated sandalwood plantation and distillery operations. The outlook is stable. At the same time, we assigned a 'B' rating and a Recovery Rating of '3' to TFS's proposed US$175 million bond issue, indicating the expectation of meaningful recovery (50%-70%) in the event of default.

"The 'B' rating on TFS reflects our opinion of the company's exposure to regulatory risk and its dependency on potentially volatile investment sales and fees for cash flow," Standard & Poor's credit analyst Brenda Wardlaw said. "Also underpinning the rating is our view of TFS's limited geographic and business unit diversity, plantations that are yet to reach harvest, and the company's weak liquidity following repayment of its bank facility."

Partly offsetting these negative rating factors is the scarcity of global Indian sandalwood trees (which supports the attractiveness of the asset class to investors), TFS's vertical integration following the acquisition of a distillery in July 2008, and the increasing diversity of the company's investor base (the recent introduction of global institutional investors limits TFS's exposure to the domestic Managed Investment Scheme investors). TFS is also increasing its share of company-owned plantations.

Ms. Wardlaw added: "The stable rating outlook is supported by our view that continued investment sales and fees, especially from more creditworthy global institutional investors, will support TFS's interest payments and operating costs. The rating may be lowered if a decline in sales to MIS investors or institutional investors hurts TFS's ability to meet its operating and financing costs. This may occur due to regulatory or other reasons. Upward rating movement is unlikely while the company's cash flow is predominantly dependant on investment sales and fee income."