Bangkok--Jun 20--Moody's Investors Service
Moody's Investors Service has assigned a provisional (P)Baa3 issuer rating to The Aromatics (Thailand) Public Company Ltd (ATC). At the same time, Moody's has assigned a provisional (P)Baa3 to ATC's proposed US$ senior unsecured bonds, the proceeds of which are to be utilized to finance capex related to the construction of Aromatics Plant II (ARO II). Moody's expects to assign a definitive Baa3 rating upon completion of the bond issuance. The ratings outlook is stable.
Moody's expects that subsequent to the proposed bond issue ATC will have
a secured debt to total debt ratio of about 26% at end-FY2005, but the (P)Baa3 ratings have not had legal subordination factored into their outcome. Moody's anticipates that ATC will reduce secured debt to total debt to about 19% in FY2006 and 11% in FY2007 through the scheduled repayment of secured debentures.
The (P)Baa3 ratings reflect [1
] ATC's sound cost structure and its
improvements since the last industry downturn, thereby better positioning it to manage the next trough in the aromatics cycle; [2
] the strong operational structure of the business, in which PTT acts as the primary sales and purchase counterparty under long-term agreements; and [3
] the positive outlook for the aromatics industry over the next 12-18 months due to a shortage in feedstock supply and robust demand.
At the same time, the (P)Baa3 ratings reflect [1
] the volatility of ATC's cash flow, resulting from the cyclical nature of the petrochemicals industry; [2
] the company's relatively short operating track record; and [3
] the large capex involved for ARO II, which will pressure key credit metrics and prompt marginal and/or negative free cash flow, after projected discretionary dividends, over the next 2-3 years, albeit this is partly mitigated by the committed undrawn US$180 million working capital facilities, and the large unrestricted cash balance as of 1Q 2005 (about US$ 95 million).
The (P)Baa3 ratings further recognize the close business integration
between ATC and PTT Public Company Ltd (PTT; local currency fundamental rating A3), which maintains 46% ownership in the company.
In addition to supplying over 75% of ATC's feedstock requirements, PTT
has assumed almost all of its third-party credit risks by acting as an
intermediary off-taker with long-term sales and procurement agreements.
In most cases, PTT has entered into back-to-back agreements with downstream off takers. PTT's strong support for ATC is also evidenced by its provision of a subordinated shareholder loan of US$150 million and a US$90 million committed trade credit facility for feedstock procurement.
Accordingly, ATC's (P)Baa3 ratings have been uplifted by one notch,
reflecting these factors and the potential for support from PTT.
ATC's cash cost position is one of the lowest when compared with those of its global or domestic competitors. This situation is a direct result of
the company's ability to procure and process condensate - its main feedstock - to produce reformate and other by-products that are largely sold to nearby customers. The proximity of the Gulf of Thailand and the company's major off-takers means ATC can achieve significant economies of scale. Successful de-bottlenecking over recent years has further added to capacity.
Moody's expects ATC to maintain sound credit protection measures over the next 2-3 years - including RCF/TD (including subordinated shareholders' loan) over 30%, TD/EBITDA around 2x and EBITDA/Int above 8.5x - based on our moderate product-to-feedstock spread assumptions. ATC is required to maintain Net Debt/EBITDA of not greater than 4x and EBITDA/(P+I) of not less than 1.25x under its existing debentures.
The ratings further incorporate ATC's large capex requirements, which
will amount to over US$700 million in the course of the next few years in connection with its ARO II expansion. Peak funding in this period will cause free cash flow, after projected discretionary dividends, to become marginal or negative, albeit we take comfort of the availability of liquidity back-up facilities and cash balance as mentioned above. In addition, we expect its key credit metrics may experience further pressure upon the completion of the ARO II expansion in 2008 when the industry is expected to trend downwards.
Moody's notes, however, that the ARO II expansion will further expand
production capacity, enhance revenue, increase efficiency and lower cost, raise barriers to entry, and capture future incremental demand in the domestic aromatics market. Moody's further notes that two new PTA lines will be coming on stream in Thailand during 2005-2006, and both agree in principal to be off-takers of ARO II's paraxylene products.
The ratings could undergo an upgrade if ATC succeeds in implementing its
ARO II project as planned, and demonstrates a track record for effectively managing its business through the next industry cycle.
On the other hand, the ratings could experience a downgrade if average
EBITDA/Int falls below 6x and TD/EBITDA exceeds 3x across the next 3-5 years. This could be a result of either one or a combination of the following: 1) a material downturn in the petrochemicals industry - currently beyond our expectations; or 2) the company undertakes further aggressive capex plans.
Furthermore, a material reduction of PTT's ownership in ATC or a material change to the supply and off-take agreements between the two companies
would have a negative impact on the ratings. The ratings would also undergo a downgrade if ATC were to breach any one of its loan covenants and thereby trigger a cross-default.
Based in Thailand, ATC is a petrochemicals company involved in the
production of benzene, toluene, paraxylene, orthoxylene and mixed xylenes, including by-products like raffinate, light naphtha, hydrogen-rich gas, LPG gas, condensate residue and heavy aromatics.
Following the completion of its stage 2 de-bottlenecking project in April 2004, ATC has a nameplate aromatic capacity of 1,101 KTPA.
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165
Sydney
Brian Cahill
Managing Director
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100 End.