Bangkok--1 Oct--TRIS Rating
TRIS Rating has affirmed the company rating of Indorama Ventures PLC (IVL) and the ratings of its senior unsecured debentures at “A+”. At the same time, TRIS Rating has assigned the rating of “A-” to IVL’s proposed issue of up to Bt15,000 million in subordinated capital debentures. The outlook remains “stable”.
The rating of IVL’s subordinated capital debentures is two notches below the corporate credit rating of IVL, as the proposed issue meets TRIS Rating’s criteria on deferability, subordination, and perpetual maturity. The payment obligation on the proposed debentures ranks junior to all debt obligations and only senior to common shares. The proposed debentures contain interest deferral and dividend stopper provisions. IVL is able to defer interest payment at its own discretion. The unpaid deferred interest will be cumulative but it will not accrue additional interest charges. If the interest deferral provision is exercised, IVL will be prohibited from making any dividend payments to any class of equity holders.
According to the terms and conditions of the subordinated capital debentures, TRIS Rating classifies the issue as having an “intermediate” equity content. IVL’s audited financial statements are expected to record the total value of the outstanding subordinated capital debentures as part of shareholders’ equity. However, when TRIS Rating calculates IVL’s financial ratios, TRIS Rating will classify 50% of the outstanding principal as debt and 50% of the debentures’ coupon distribution as interest. The “intermediate” equity content will fall to “minimal” (or 0% equity treatment for this issue) at the end of the fifth year after the subordinated capital debentures are issued. This is because the remaining effective tenor of the issue is less than 20 years, according to TRIS Rating’s criteria. Although the subordinated capital debentures are perpetual, TRIS Rating considers the effective maturity date of the issue based on the time the interest spread step up is 1% higher than the initial spread. The interest spread of the subordinated capital debentures will step up by 1% at the end of the 25th year.
Disregarding the perpetual term, the issue carries a call option. IVL has a call option right to redeem the issue after the 5-year non-call period or if certain redemption events occur, as specified in the terms and conditions. In addition, IVL is allowed to make open-market repurchases of the issue at any time. In the event of a partial repurchase, the remaining outstanding of the issue will be considered as debt.
The ratings of IVL and its issues reflect the company’s strong position as a leading worldwide producer in the polyester value chain, cost competitiveness, reliable production base due to vertical integration, plus its geographically diverse customer base which spans the globe. The ratings also take into consideration the capability and experience of the management team, as well as IVL’s access to key technologies. However, the ratings are constrained by the volatile nature of the petrochemical industry, an oversupply of purified terephthalic acid (PTA) caused by new capacity, and uncertain global economy. Its investment appetite in search of growth, which was largely financed by debt, has strained the company’s balance sheet.
The “stable” outlook is based on TRIS Rating’s anticipation that the industry margin will gradually recover from the current level. In addition, IVL will be able to demonstrate more stable cash flow generation and maintain sufficient liquidity to act as a cushion against the volatility inherent in the petrochemical industry. The industry down cycle, if prolonged, could be a negative factor to the ratings.
IVL was established by the Lohia family on 21 February 2003 as a holding company. IVL was listed on the Stock Exchange of Thailand (SET) on 5 February 2010. Currently, the Lohia family holds a 66.4% stake in IVL. The company invests mainly in businesses along the polyester value chain. As of 30 June 2014, IVL’s total installed capacity was 7,382 thousand tonnes per annum (KTA), of which 50% of total installed capacity was polyethylene terephthalate (PET), 24% was PTA, 19% was polyester fiber equivalent, and 7% was monoethylene glycol (MEG) equivalent. In the polyester value chain, PTA and MEG are the major feedstocks used in producing PET and polyester fiber.
At present, IVL’s facilities are located in 16 countries across four continents: Asia, Europe, North America, and Africa. IVL’s business model of fully vertical integration and diversified presence around the globe should provide some cushion and a competitive advantage to mitigate the risk associated with petrochemical industry. However, the influx of new PTA plants in China and fragile global economy have raised concerns over intensified competition and pressure on IVL’s profitability.
IVL’s financial profile has remained under pressure because the polyester value chain is currently in an industry down cycle. The industry outlook is expected to improve in the medium term. Uncompetitive plants have been forced to shut down, which will help balance demand and supply. In the first six months of 2014, IVL reported total revenue of Bt125,676 million, a 12% year-on-year (y-o-y) increase, mainly due to higher sales volumes. The operating income before depreciation and amortization, as percentage of sales, has gradually improved, rising from 5.0% in 2013 to 6.2% in the first six months of 2014, which partly reflects a slight increase in the PTA margin, and the resumption of operations at the US MEG plant, after a shutdown for maintenance in 2013. IVL’s profitability, in terms of earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne of production volume, improved from US$79 per tonne in 2013 to US$89 per tonne in the first six months of 2014. The company generated funds from operations (FFO) of Bt6,852 million in the first six months of 2014, while the EBITDA interest coverage ratio was 4.5 times in the first six months of 2014.
Total debt at the end of June 2014 was Bt82,280 million, decreasing from Bt85,266 million at the end of 2013. The total debt to capitalization ratio improved from 58.1% at the end of 2013 to 56.6% at the end of June 2014. IVL has continued with its existing expansion projects, including a capacity expansion at its PTA plant in Rotterdam, the Netherlands, and upgrading production line to focus on high value added (HVA) products. The company has budgeted approximately Bt16,600 million for capital expenditures over 2014-2017. The expansions will boost IVL’s total capacity to approximately 8,000 KTA by 2016. In addition, TRIS Rating’s base case scenario has incorporated acquisitions and new investments budgeted at Bt58,400 million over 2014-2017. This figures included the acquisition of PHP Fibers GmbH (PHP) in February 2014 and Artenius TurkPET in June 2014. These two transactions were worth Bt4,063 million in total. Looking forward, the company’s debt will be further increase to satisfy its acquisitions. The issuance of the subordinated capital debentures and two series of warrants, if executed, could support IVL’s capital structure. Onward, TRIS Rating expects that IVL will manage the leverage level to maintain the ratio of net interest bearing debt to equity at less than 1.0 times, in accordance with the company’s policy. In terms of liquidity, the company’s FFO is expected to exceed Bt13,000 million in 2015, once the new capacity is in operation. This level of FFO is sufficient to service IVL’s debt obligation. Approximately Bt5,800 million in debt will come due in 2015, while Bt11,800 million will be due in 2016 and Bt13,000 million will be repaid in 2017. In addition, IVL also has an unused credit line of approximately Bt20,000 million. This credit line will serve as a cushion for the company.
Indorama Ventures PLC (IVL)
Company Rating: A+
Issue Ratings:
IVL16OA: Bt210 million senior unsecured debentures due 2016 A+
IVL16OB: Bt2,690 million senior unsecured debentures due 2016 A+
IVl173A: Bt1,500 million senior unsecured debentures due 2017 A+
IVL174A: Bt1,500 million senior unsecured debentures due 2017 A+
IVL174B: Bt2,500 million senior unsecured debentures due 2017 A+
IVL186A: Bt550 million senior unsecured debentures due 2018 A+
IVL18OA: Bt98 million senior unsecured debentures due 2018 A+
IVL18OB: Bt1,302 million senior unsecured debentures due 2018 A+
IVL18DA: Bt780 million senior unsecured debentures due 2018 A+
IVL193A: Bt800 million senior unsecured debentures due 2019 A+
IVL194A: Bt1,500 million senior unsecured debentures due 2019 A+
IVL206A: Bt520 million senior unsecured debentures due 2020 A+
IVL20DA: Bt880 million senior unsecured debentures due 2020 A+
IVL21OA: Bt37 million senior unsecured debentures due 2021 A+
IVL21OB: Bt3,163 million senior unsecured debentures due 2021 A+
IVL224A: Bt1,250.5 million senior unsecured debentures due 2022 A+
IVL224B: Bt2,649.5 million senior unsecured debentures due 2022 A+
IVL22DA: Bt1,645 million senior unsecured debentures due 2022 A+
IVL236A: Bt1,100 million senior unsecured debentures due 2023 A+
IVL243A: Bt1,400 million senior unsecured debentures due 2024 A+
IVL24DA: Bt1,475 million senior unsecured debentures due 2024 A+
Up to Bt15,000 million subordinated capital debentures A-
Rating Outlook: Stable