Bangkok--28 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has revised the Outlook on IRPC Public Company Limited’s (IRPC) rating to Negative from Stable. At the same time, the agency has affirmed IRPC’s National Long-Term Rating at ‘A-(tha)’, National Short-Term Rating at ‘F2(tha)’, and the National Long-Term Rating on its senior unsecured debentures at ‘A-(tha)’.
The Outlook revision reflects IRPC’s weaker-than-expected operating cash flow in 2013 and elevated capex through 2015, resulting in weak forecast credit metrics. Its leverage will remain high and be above the negative rating guideline in 2014 due to high capex, although Fitch Ratings expects operating cash flow to improve when the benefits of these investments start to accrue from 2H15. In addition, IRPC is more vulnerable to weak market conditions in the downstream refining and petrochemical industry than its domestic peers, given its lower complexity and weaker cost competitiveness, although the planned capex will enhance the overall complexity of IRPC’s assets.
Fitch downgraded IRPC’s standalone rating to ‘BBB+(tha)’ from ‘A-(tha)’ in January 2013 due to the expected deterioration in its credit profile. But this was offset by a one-notch uplift to reflect the growing strategic importance of IRPC to and its operational links with its 39%-owner PTT Public Company Limited (PTT, AAA(tha)/Stable).
Key Rating Drivers
Leverage to Remain High: High capex is likely to hinder IRPC’s efforts to reduce its currently high financial leverage in the next two years. Fitch projects IRPC’s funds flow from operations (FFO)-adjusted net leverage to remain above 5.0x in 2014, which is high for its current ratings. However, more favourable credit terms from PTT has enabled it to manage its increased debt levels and liquidity during this period of high investment. The Negative Outlook reflects Fitch’s view that IRPC may be able to improve its credit metrics to levels appropriate for its ratings by 2015-16.
Further Extension of Credit Terms: IRPC expects to secure from PTT more favourable credit terms for crude oil purchases in 2014, in addition to an extension of credit terms in 2013. This will support IRPC’s liquidity and reduce the need for incremental debt during the heavy investment period in 2013-2014. Fitch expects credit terms to be normalised once a majority of the planned capex is disbursed, and higher cash generation from the improved operations would allow the company to improve its financial leverage.
Sufficient Liquidity: Despite continuing high leverage in 2014, Fitch believes IRPC’s liquidity will remain sound. Its liquidity is supported by unrestricted cash of THB7.6bn and available committed facilities of THB9bn at end-9M13, compared with THB9.4bn of debt maturing within 12 months. Liquidity is further supported by flexible credit terms from PTT.
Fully Integrated Producer: IRPC has a competitive advantage as a fully integrated oil refining and petrochemicals producer, and its expertise and long track record in downstream petrochemicals in Thailand. Vertical integration provides cost advantages, a broad product range and reduced earnings volatility relative to non-integrated operators. An increase in high value-added products with the proposed capex should improve its margins and reduce margin volatility.
Linkage to PTT: IRPC’s Long-Term National Rating incorporates a one-notch uplift from its standalone credit profile, reflecting its enhanced links with PTT. PTT is the single largest shareholder of IRPC. IRPC falls within PTT’s central treasury management framework, key management personnel are rotated among PTT and its related companies including IRPC, and PTT extends IRPC flexible credit terms.
Highly Cyclical Business: IRPC’s credit profile is tempered by its high vulnerability to oil prices, volatile refining margins and petrochemical prices, which can significantly affect its earnings and cash flow generation. IRPC is also exposed to supply risk associated with crude oil, as Thailand is highly dependent on imported oil.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable at the current rating level include
- Stronger-than-expected cash flow generation, which could help IRPC improve its credit profile faster than currently expected
- Evidence of stronger ties with PTT
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Weaker-than-expected operating cash flow, resulting in slower-than-expected deleveraging
- Reduction of the credit terms on crude purchase, resulting in higher-than-expected leverage
- Projected FFO adjusted net leverage sustained at above 4.25x and FFO fixed charge coverage weaker than 3.0x by end-2015
- Weakening of linkages with PTT