Bangkok--26 Jun--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating at 'AA(tha)', National Short-Term Rating at 'F1+(tha)', and the National Long-Term senior unsecured rating at 'AA(tha)'. The Outlook is Stable.
The affirmation reflects its strong business profile, as the largest fully integrated petrochemical and refining company in Thailand. However, its rating headroom has reduced due to high committed capex over the medium term that will weaken the financial profile.
KEY RATING DRIVERS
Limited Rating Headroom: Fitch expects capex and investment to rise over 2017-2021 due to the company's investments in two large projects - the retrofit of its Map Ta Phut (MTP) facility and building of a propylene oxide (PO) and polyol plant. The expected increase in investment also includes the acquisition of six petrochemical companies from its major shareholder, PTT Public Company Limited (PTT, AAA(tha)/Stable). Fitch expects PTTGC's leverage, as measured by FFO-adjusted net leverage, to rise to around 1.4x-1.6x over 2017-2019 (2016: 1.1x), before reducing after 2019. The company's financial risk profile will remain under pressure in the medium term.
Strong Cash-Flow Generation: PTTGC's operating cash flows are larger and less volatile than those of Thai refinery and petrochemical peers, thanks to its bigger operating size, high integration to petrochemicals, which have higher margins, and a favourable feedstock supply arrangement with PTT. Fitch expects PTTGC's operating cash flow to increase over 2017-2021, mainly driven by new capacity for its existing and new products. However, large increases are only expected when the MTP retrofit and PO/Polyol projects start operations in 2020-2021.
Fully Integrated, Low-Cost Producer: PTTGC is Thailand's largest fully integrated petrochemical and refining company. It has a wide product range, and benefits from its large operating scale. Feedstock costs are competitive, as most of its feedstock for olefins is gas-based, which is available domestically, and cheap relative to naphtha, which is used by its competitors. This advantage will expand when oil prices increase. PTTGC also benefits from a favourable feedstock supply arrangement with PTT, which reduces margin volatility when market conditions fluctuate.
Highly Cyclical Business: PTTGC's credit profile is tempered by its vulnerability to the highly cyclical petrochemical sector and fluctuations in refining margins and crude oil prices, which can result in volatile margins and operating cash flow.
Linkages with PTT: PTTGC's Long-Term National Ratings incorporate a one-notch uplift from its standalone credit profile of 'AA-(tha)', reflecting its moderate links with PTT. Some of the benefits from its association with PTT, such as feedstock supply, are incorporated in its standalone credit profile's assessment.
DERIVATION SUMMARY
PTTGC's standalone credit profile of 'AA-(tha)' reflects the size and large integration to petrochemicals, as well as its low-cost position as a gas-based producer. It has the strongest business profile among Thai downstream oil and gas peers, while its financial leverage is lower. PTTGC has larger operating scale and more integration to petrochemicals than Thai Oil Public Company Limited (TOP, AA-(tha)/Stable, standalone credit profile of A+(tha)). It also has higher profitability than TOP.
PTTGC's operation and diversification are much larger than IRPC Public Company Limited's (A-(tha)/Stable, standalone credit profile of BBB+(tha)). In addition, it has a relatively stronger balance sheet, and better operating profit margin.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- The benchmark Brent crude at USD52.5 per barrel in 2017, USD55 per barrel in 2018, USD60 per barrel in 2019, and USD65 per barrel thereafter – with PTTGC's crude procurement cost adjusted for applicable premiums
- Market refining margin to soften in 2017
- Aromatics spread to recover gradually in 2017
- High density polyethylene (HDPE) price to increase following oil price increase
- USD4.2 billion capex over 2017-2021
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Evidence of stronger ties with PTT
- However, positive action on PTTGC's standalone rating is unlikely in the medium term, given its large capex plans and the long lead times before these investments generate cash
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A sustained rise in leverage (as measured by FFO adjusted net leverage) to above 1.5x, due to large debt-funded investments or persistently thin refining margins and petrochemical spreads
- Fitch will treat a commitment to any significant debt-funded project or investment as a rating event
- Weakened ties with PTT
LIQUIDITY
Strong Liquidity: PTTGC had non-restricted cash of THB54.5 billion at end-March 2017. This is far larger than the THB14.0 billion of debt due within the next 12 months. The debt repayment schedule is quite spread out over the next five years, with the next large repayment of USD1 billion notes due in 2022. The liquidity is also supported by short-term credit facilities from PTT and PTTGC's ability to raise funds in the capital market and from financial institutions.