Bangkok--14 May--Moody's
Moody's Investors Service has changed to negative from stable the outlook for the Baa3 domestic currency issuer rating and foreign currency senior unsecured rating of PTT Chemical Public Company Ltd (PTT Chemical).
"The change in outlook reflects PTT Chemical's weakening financial profile, resulting in turn from its continuing sizeable investments against the backdrop of subdued petrochemical market conditions," says Renee Lam, a Moody's Vice President and Senior Analyst.
PTT Chemical is in the midst of its significant capacity expansions, including an ethane cracker plant with 1.0 million tonnes per annum (tpa) in capacity and polyethylene plants with a combined capacity of 700,000 tpa. While these capacity additions will strengthen the company's market position in the long term, the remaining required capital spendings take place at a time when its profitability and cash flow generation are expected to be dampened by the challenging industry conditions.
"With capex of about Baht 30 billion scheduled for 2009-2010, and a high likelihood of weak operating cash flow generation in the next 12 to 18 months, PTT Chemical's adjusted debt to EBITDA could increase further in 2009, reducing the cushion it enjoys within the current rating," says Lam.
The ramp-up in new production capacity in the Middle East and China is set to start from 2H2009, which is likely to exacerbate the imbalance between supply and demand. Therefore, the recovery of product spreads, which have been squeezed sharply since 2H08, remain uncertain.
"In this environment, the speed of subsequent de-leveraging is highly dependent on the industry conditions which will prevail when the company's new capacity comes on stream over 3Q09 to 4Q10," adds Lam.
The Baa3 rating continues to reflect PTT Chemical's leading position in the domestic market, competitive cost structure, secured access to feedstock supply, long-term sales contracts, and moderate financial policies. The rating also incorporates a one-notch uplift to reflect the high likelihood of its parent PTT Public Company Limited (PTT, A2/Stable)
-- which owns 49.3% -- providing credit support in a distress situation.
The negative ratings outlook could return to stable if PTT Chemical successfully manages and implements its expansion projects, and/or demand strengthens to absorb its new capacity, such that the company maintains adjusted debt / EBITDA at below 3x on a sustained basis.
On the other hand, the ratings could experience downward pressure if adjusted debt to EBITDA exceeds 3x consistently, which could be a result of 1) PTT Chemical facing major disappointments in implementing its expansion projects; 2) there is a further material downturn in the petrochemical industry beyond current expectations. Furthermore, any reduction in the support level from PTT would also be negative for the rating.
The last rating action with respect to PTT Chemical was taken on August 25, 2006, when its Baa3/Stable rating was affirmed.
The principle methodology used in rating PTT Chemical was the Global Chemical Industry rating methodology (February 2006), which can be found at www.moodys.com in the Credit Policy & Methodology directory, in the Ratings Methodologies subdirectory.
PTT Chemical is the largest petrochemical company in Thailand. At end-2008, it had an ethylene/propylene production capacity of 1.86 million tpa, and 500,000 tpa for polyethylene and 395,000 tpa for MEG.
The company is a major 49.3%-owned associate of PTT.
Hong Kong
Renee Lam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Singapore
Tony Tsai
Senior Vice President
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308