Bangkok--16 May--Moody's
Moody's Investors Service has assigned a Baa3 corporate family rating to IRPC Public Co Ltd (IRPC) and a (P)Baa3 senior unsecured rating to the company's proposed issuance of 10-year notes.
The rating outlook is stable. The proceeds of the bonds will be used to refinance part of the bridge loans outstanding after IRPC's exit from its recapitalization and debt-restructuring exercise.
"The Baa3 rating reflects the balance of profits arising from the close integration which exists between IRPC's oil refinery operation and fuel production business," says Alan Greene, a Moody's SVP.
"The company is a major producer of fuel, while some of the products from its petrochemical operations enjoy leading positions in their respective markets in Thailand," adds Greene.
"Furthermore, the rating recognizes Moody's expectation of support from PTT (A2, stable), a 31.5% shareholder, and the strong and growing links between the two companies in terms of operational and financial management," says Greene. In addition, following the rehabilitation exercise, leverage has achieved modest levels.
However, offsetting these credit strengths are the fact that IRPC functions in a inherently cyclical industry, while its operations are concentrated at a single site.
"It also has a relatively high dependence on spot fuel sales and its refining capacity is under-utilized, although its planned capex program should increase refinery output and complexity in coming years," says Greene.
IRPC's Baa3 rating reflects the combination of its stand-alone baseline credit assessment (BCA) of 11 with an expectation of support from PTT.
This support is considered by applying Moody's Joint Default Analysis (JDA) to Government Related Issuers (GRI) in view of IRPC's 31.5% ownership by PTT, which in turn is a GRI.
This recognises medium support from PTT, taking into account its actions as the leading Strategic Shareholder under the corporate rehabilatation and debt restructuring process and the close business and management ties that are evolving with IRPC.
Moreover, the dependence on credit factors that could weaken both companies simultaneously is regarded as medium, and arises from joint crude oil purchases as well as the increasing level of inter-company supply and off-take arrangements.
The outlook is stable, reflecting Moody's expectation of a successful implementation of IRPC's capex plans and steady improvements in overall operations as PTT's managerial style, financial discipline and technological resources generate cost reductions and efficiencies.
An upward rating trend could evolve over time if 1) there is an increase in the expected level of support from PTT, and which could be reflected by its shareholding exceeding the anticipated long-term, 49% level, or formal financial support mechanisms are introduced, or 2) there is a strengthening in the BCA, which could evolve if the changes at IRPC bring better-than-expected results, or the petrochemicals market remains unexpectedly firm, leading to the maintenance of RCF/Adjusted Debt above 35% on a consistent basis.
On the other hand, the rating may experience a downward trend if there is a decline in 1) the expected level of support from PTT, or 2) the BCA.
A fall in the expected support level could emerge if PTT fails to maintain or increase its ownership in IRPC, or reverses any steps taken towards closer integration of the two companies.
By contrast, a decline in the BCA could result from i) major disappointments in implementing the new management's strategy, ii) aggressive capital investments that materially change its business mix, and iii) material deteriorations in refining margins and product-to-feed spreads; such that RCF/Adjusted Debt drops below 15-20% on a consistent basis. Moody's would also re-examine the rating if long-term refinancing was not successfully obtained in 2007 as well as the role played by PTT in such a situation.
IRPC Public Co Ltd is the second largest oil refinery and third largest petrochemicals producer in Thailand.
Singapore
Alan Greene
Senior Vice President
Corporate Finance Group
Moody's Singapore Pte Ltd.
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Singapore
Nancy Koh
Vice President - Senior Analyst
Corporate Finance Group
Moody's Singapore Pte Ltd.
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