Bangkok--25 Aug--Moody's
Moody' Investors Service has affirmed the Baa3 long-term rating of PTT Chemical Public Company Ltd (PTT Chem)
following its announcement that it will purchase from its parent PTT Public Company Ltd (rated A2) the remaining 50% of 2 petrochemicals companies, namely PTT Polyethylene Company Ltd (PTTPE) and Bangkok Polyethylene Public Company Ltd (BPE). The total consideration for the proposed transactions is Baht 3.75 billion
The transactions will take PTT Chem's ownership in both companies to 100%, and they are subject to shareholder approval on 28 September, 2006.
"The rating affirmation reflects Moody's view that the funding structure of the proposed acquisitions will have a neutral effect on PTT Chem's capital structure and debt coverage measures", says Moody's Terry Fanous, a Senior Vice President and lead analyst.
The PTTPE project requires significant capex of around Baht 52.0 billion in order to build a 1.0-million-ton ethane cracker and 2 polyethylene plants. However, Moody's considers the capital cost to be manageable within PTT Chem's rating. The company will partly raise funding through a rights equity issue of Baht 28.0 billion with PTT support. PTT announced yesterday that it will support the capital raising and Moody's believes that, even if other shareholders do not, the PTT uptake will be sufficient for PTT Chem to maintain its current rating.
The proposed funding will support PTT Chem in maintaining a moderate capital structure which, combined with its existing solid credit metrics, will mitigate the execution risk associated with bringing the expansion project on-stream.
Based on PTT Chem's investment and funding plans, Adjusted Debt/EBITDA is expected to remain below 2.5x over at least the next 3-4 years. The project's successful commissioning will strengthen PTT Chem's credit profile.
The Baa3 rating for PTT Chem reflects the application of Moody's Joint Default Analysis (JDA) to Government Related Issuers (GRI) in view of its 50.03% ownership by PTT Public Company Limited (PTT), which is in turn a GRI. Accordingly, the Baa3 rating reflects the combination of the following inputs:
- Baseline credit assessment of 11 (on a scale of 1 to 21, where 1 represents lowest credit risk)
- A2 local currency rating of PTT, the support provider
- Medium dependence, recognizing the close business integration between PTT Chem and PTT.
- Medium support, which takes into account PTT's 50.03% ownership in PTT Chem, PTT Chem's flagship company position and its strategic importance within PTT's energy value chain.
The rating could undergo an upgrade if there is 1) an increase in the support level from PTT or 2) a strengthening in the baseline credit assessment, which would be due to PTT Chemical successfully managing and implementing its expansion projects as planned as well as consistently generating free cash flow and maintainng Adjusted Debt/EBITDA below 2.25x
on a sustained basis.
On the other hand, the rating could experience downward pressure if there was a 1) reduction in the support level from PTT, or 2) a weakening in the base line credit assessment, such that EBITDA/Interest fell below 5.0x and Adj Debt/EBITDA exceeded 3x across the next 3-5 years. This could be a result of: 1) PTT Chemical facing major disappointments in
implementing its expansion projects; 2) its planned equity issuance is delayed or downsized; or 3) a material downturn occurs in the petrochemicals industry.
PTT Chemical is the largest olefins producer in Thailand. It has a nameplate capacity of 1,523kta -- 1,146kta for ethylene and 377kta for propylene.
Terry Fanous
Senior Vice President
Corporate Finance Group
Moody's Investors Service Pty Ltd
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