Bangkok--9 Feb--Fitch Ratings
Fitch Ratings (Thailand) Limited has revised the Outlook on IRPC Public Company Limited's (IRPC) to Stable from Negative. The agency has also affirmed the National Long-Term Rating at 'A-(tha)', National Short-Term Rating at 'F2(tha)', and the senior unsecured National Rating at 'A-(tha)' The Outlook revision reflects our expectation of more headroom over the credit metrics appropriate for the current ratings. Fitch expects IRPC's leverage (as measured by FFO-adjusted net leverage) to stay at around 3.5x-4.0x in 2016-2017, which is lower than previously projected at 3.5x-4.5x. This is supported by lower-than-expected debt in 2015, improving operating cash flows, and continued extension of the credit terms arrangement with PTT Public Company Limited (AAA(tha)/Stable), its single-largest shareholder. Fitch expects IRPC's leverage to improve further after 2017.
KEY RATING DRIVERS
Forecast Higher Earnings: Fitch expects IRPC to generate annual EBITDA above THB15bn in the medium term. The start-ups of its two major projects, the Upstream Project for Hygiene & Value-Added-Product and polypropylene expansion and polypropylene inline compound project, will be a key driver of earnings growth in 2017-2018. IRPC's credit profile is tempered by its high vulnerability to oil prices, volatile refining margins and petrochemical spreads. However, these projects will allow the company to run its refinery at higher utilisation and generate wider margins, as well as adding more petrochemical capacity.
Lower Capex, Improving Metrics: Capex should remain high in 2017, reflecting capex associated with these major projects. High capex over 2016 and 2017 also reflects some time delays associated with these major projects. However, Fitch expects committed and maintenance capex to be substantially lower in 2018 and beyond. We expect the company to deleverage beyond 2017 due to higher earnings and lower debt requirements, although high dividend payments will continue.
Credit Terms, Liquidity Support: Fitch expects IRPC's extended credit terms arrangement with PTT on crude purchases to continue to provide liquidity support. The credit terms of 60 days from PTT are available until end-2017, although this has come down from 90 days in July 2016. IRPC expects the terms can be extended to 2018 by mutual agreement, if necessary.
Improving Business Profile: An increase in the output of high-value-added products following investments to expand facilities is likely to widen margins and reduce margin volatility. IRPC has a competitive advantage as a fully integrated refining and petrochemicals producer, with its expertise and long track record in Thailand's petrochemicals business. Vertical integration provides cost advantages, a broad product range and reduced earnings volatility relative to non-integrated operators.
One-Notch Ratings Uplift: IRPC's long-term ratings incorporate a one-notch uplift to take into account its linkages with PTT. IRPC falls within PTT's central treasury management framework, while key management personnel from PTT are rotated among its group of companies (including IRPC), according to PTT. In addition, PTT has extended commercial support to IRPC, such as the extended credit periods for feedstock supplies.
DERIVATION SUMMARY
IRPC's ratings reflect the integration of its refinery to petrochemicals production. However, IRPC's business profile is moderate relative to Thai downstream oil and gas peers, while its leverage is quite high relative to these peers. IRPC has a smaller operating scale than PTT Global Chemical Public Company Limited (AA(tha)/Stable) and Thai Oil Public Company Limited (AA-(tha)/Stable), and much higher leverage than these two companies. IRPC's operating scale is larger than that of Esso (Thailand) Public Company Limited (ESSO, F1(tha) for the bills of exchange), and its leverage is slightly stronger. However, we view ESSO as having stronger linkages with its parent.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- The benchmark Brent crude at USD45 per barrel in 2017, USD55 per barrel in 2018, USD60 per barrel in 2019, and USD65 per barrel thereafter – with IRPC's crude procurement costs adjusted for applicable premiums
- Gross integrated margins to improve in 2017-2019
- High capex in 2016-2017, and falling in 2018-2020
- 60-day credit-term extension from PTT will continue in 2017, and decline to a more normal 30 days by end-2018
- 45%-50% dividend payout ratio
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Sustained FFO-adjusted net leverage below 3x
- Disciplined approach to capex and shareholder distributions, demonstrating a commitment to improving its balance sheet quality
- Evidence of stronger ties with PTT
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Weaker-than-expected operating cash flows, increasing debt-funded investments or high cash distributions to shareholders resulting in sustained FFO-adjusted net leverage rising above 4.5x (2015: 3.8x)
- A weakening of linkage with PTT
LIQUIDITY
Sufficient Liquidity: IRPC's liquidity is supported by unrestricted cash of THB2.0bn and available committed working-capital facilities of THB5.7bn at end-September 2016; liquidity is further supported by its flexible credit terms and THB10bn (increased from THB5bn a year before) in short-term credit facilities from PTT. In addition, the company has secured THB20bn of long-term loan facilities, reserving for repayment of USD238m notes, THB7.4bn in debentures and THB3.7bn in a long-term loan due in 2017.