Bangkok--19 Jul--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed IRPC Public Company Limited’s (IRPC) National Long-Term rating at ‘A-(tha)’ with a Stable Outlook, National Short-Term rating at ‘F2(tha)’ and National Long-Term rating on its senior unsecured debentures at ‘A-(tha)’.
IRPC’s ratings are underpinned by its competitive advantage as a fully integrated oil refining and petrochemicals producer, and its expertise and the long track record in downstream petrochemical products in Thailand. IRPC’s vertical integration provides cost advantages, a broad product range and reduced earnings volatility relative to non-integrated operators. Increase in high value added products, an area that will benefit further with its proposed investments, will reduce exposure to commodity price volatility.
Fitch has affirmed the ratings despite revised expectations that financial leverage would remain elevated in 2012-2014, rather than gradually decreasing over the medium-term as previously forecast. However, this leaves very limited headroom under IRPC’s current ‘A-(tha)’ rating. Fitch expects IRPC’s adjusted net debt to operating EBITDAR to increase to mid-3.0x in 2012 (2011: 2.8x) and stay between 3.0x and 3.25x in 2013-2014. This reflects the weaker outlook of the refinery and petrochemical industry in 2012 and IRPC’s higher capex.
Fitch expects the refining and petrochemical businesses to be under pressure for the rest of 2012 from weak global economic conditions. Chemicals margins are likely to remain thin in 2012, while refining margins should soften from the highs of 2011. Fitch expects the chemical business to see some recovery in 2013; however, this depends to a large extent on the recovery of the Chinese economy and the performance of advanced economies, as well as oil price movements.
IRPC has revised up its medium-term capex programme. It now plans to spend USD2.1bn in 2012-2016 to improve asset utilisation and increase its capacity and product range. This puts additional pressure on IRPC’s credit metrics during the investment phase. However, Fitch views that IRPC has some flexibility on the timing of its capex.
IRPC benefits from cost savings gained through cooperation with PTT Public Company Limited (PTT, ‘AAA(tha)’/Stable), its largest shareholder (39% ownership), especially on procurement of feedstock and product swaps. Nevertheless, IRPC’s operational overlap and integration with the PTT group remain limited due to its independent and fully integrated facilities and is hence IRPC’s ratings does not incorporate any specific rating uplift on account of PPT’s ownership.
IRPC’s credit profile is constrained by its vulnerability to oil prices, volatile refining margins and petrochemical prices, which can significantly affect its earnings and cash flow generation. The ratings also take into account the company’s aggressive investment plan, and its reliance on exports due to Thailand’s excess capacity in polymers (about 58% of the country’s production was exported in 2011). Furthermore, IRPC is exposed to supply risks associated with crude oil, as Thailand is highly dependent on imported oil.
What Could Trigger A Rating Action?
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-maintaining leverage, as measured by adjusted net debt to operating EBITDAR, below 2.5x on a sustained basis
-strengthening of operational and strategic linkages with PTT
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-a sustained increase in leverage over 3.25x due to persistently low refining margins and petrochemical spreads, or higher-than-expected debt-funded investments