Bangkok--30 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has today removed PTT Aromatics and Refining Public Company Limited’s (PTTAR) ratings from Rating Watch Negative (RWN), following the bondholders’ approval for a bond covenant change. Simultaneously, due to the deterioration in PTTAR’s credit profile, Fitch has downgraded PTTAR’s National Long-term rating to ‘A-(tha)’ (A minus (tha)) from ‘A(tha)’, National Short-term rating to ‘F2(tha)’ from ‘F1(tha)’, and the National Long-term rating on its secured and amortising debentures to ‘A(tha)’ from ‘A+(tha)’. The Outlook is Stable.
The removal of the RWN, which was placed on the ratings in December 2008, is based on the success of resolving the potential breach of the bond covenant. The bondholders met on 19 January 2009 and agreed to change the bond covenant, removing the requirement for PTTAR to maintain its net debt (excluding trade payable debts and documentary trade financing from banks) to EBITDA ratio at below 4x, and debt service coverage ratio above 1.25x, and replacing them with a current ratio (current asset to current liability) of above 1x and non-current liability to equity of below 2x. In exchange, PTTAR will increase coupon by 60bp. The risk arising from breaching the covenant has been removed.
Nevertheless, the rating downgrades reflect a material weakening in PTTAR’s financial leverage and worse than expected earnings growth, resulting in lower financial flexibility. Its debt and net debt increased significantly for 9M08 to THB66.9bn and THB66.3bn, respectively, at end-September 2008 from THB35.8bn and THB33bn at end-2007, respectively, due to higher working capital needs as a result of skyrocketing oil prices and excess crude inventory owing to the unplanned shutdown, and large capex. Meanwhile, its cash flow generation was lower than expected owing mainly to weak product-to-feed margin and inventory losses. PTTAR’s EBITDAR for 9M08 weakened to THB7.7bn (including THB4.3bn of inventory mark-down) from THB19.5bn yoy. As a result, its financial leverage, measured by adjusted net debt to EBITDAR, rose substantially to 6.5x (5.6x, excluding subordinated debt from shareholder) in 9M08 from 1.3x (0.9x, excluding subordinated debt) in 2007.
A significant de-leveraging is not expected over the next two years, given the weak outlook in the refining and aromatics businesses and the company’s planned capex. Although Fitch expects the company’s financial leverage to improve in 2009 and 2010, given an ease of working capital requirement due to a sharp decline in oil prices, and lower capex, its adjusted net debt to EBITDAR is likely to remain high during 2009-2011, before falling to around 2.5x by 2012.
The ratings are supported by PTTAR’s strategic and operational links to PTT Public Company Limited (PTT, ‘AAA(tha)’/Stable), and its larger operating scale and more flexible and diversified operations after the amalgamation of The Aromatics (Thailand) Public Company Limited and Rayong Refinery Public Company Limited, which should, to a certain extent, help reduce overall earnings volatility. The ratings also reflect PTTAR’s secured long-term feedstock and product off-take agreements, its modern and complex refinery and its cost competitiveness.
The Stable Outlook reflects Fitch’s expectation that PTTAR will maintain its relatively strong market position, supported by integrated refining and aromatics operation and cost competitiveness, and gradually de-leverage over the medium-term. Strong improvement in profitability resulting in significant de-leveraging and sustained lower financial leverage would be positive for the ratings. However, a further increase in financial leverage (i.e. adjusted net debt to EBITDAR is above 6x in 2009) and sustained low gross refining margin (excluding inventory gains and losses) at below USD3.50 per barrel for 18-24 months, could negatively affect the ratings.