Bangkok--5 Jun--Fitch Ratings
Fitch Ratings (Thailand) Limited has today affirmed PTT Chemical Public Company Limited’s (PTTCH) National Long-term rating at ‘A+(tha)’, National Short-term rating at ‘F1(tha)’, its outstanding senior unsecured bonds at ‘A+(tha)’, and its senior secured debentures at ‘AA-(tha)’. The agency has simultaneously revised the Outlook to Stable from Negative.
The Outlook revision reflects PTTCH’s stronger-than-expected earnings and credit metrics in 2009 and Fitch’s expectation that the company will bring its leverage (measured by adjusted net debt to EBITDAR and funds from operations adjusted net leverage) to below 2.0x by 2011, driven by the full commercial run of the new ethane cracker and polymer capacities, and from a decline in capex. In addition, demand for petrochemicals, particularly in Asia, has recovered stronger-than-expected.
PTTCH reported stronger-than-expected operating performance in 2009 with EBITDAR of THB15.6bn from a rebound in product-to-feed margins during H209 (from a very weak level during Q408-Q109). Although its net debt and adjusted net debt to EBITDAR increased to THB34.6bn and 2.2x, respectively, at end-2009, they were significantly better than Fitch’s expectation; this was a result of stronger-than-expected operating cash flows and lower-than-expected capex. Its adjusted net debt to last-12-month EBITDAR improved to 1.7x at end-Q110. Although the expected weak product-feed-margins in H210 are likely to keep its leverage above 2.0x in 2010, its leverage will improve to below 2.0x after 2010, thanks to higher production and product-to-feed margins.
PTTCH’s ratings are supported by the high level of business and operational integration with PTT Public Company Limited (PTT, ‘AAA(tha)’/Stable), as it is the latter’s main gas-based olefins arm. PTTCH has a favourable feedstock arrangement and a product off-take agreement with PTT. The ratings are also based on its large and low-cost olefins production, with an increasing level of downstream integration, which should help support earnings growth and reduce earnings volatility in the longer term.
The ratings are constrained by exposure to the highly cyclical petrochemical sector, resulting in volatile margins and unpredictable cash flow generation. The petrochemical industry in 2010 is likely to be depressed by excess supply due to the substantial increase of new capacities, particularly low cost ethane-based capacity from the Middle East, and rising feedstock costs. Therefore, this is likely to depress the industry’s margin and utilisation rates, particularly if global economic growth remains weak.
The Map Ta Phut issues will constraint PTTCH to fully utilise its new capacities, as seven of its projects have been suspended as a result of the Central Administrative Court’s order to require government agencies to suspend 65 projects in the Map Ta Phut area due to environmental concerns; the company’s new ethane cracker relies on gas feedstock from PTT’s sixth gas separation plant (GSP#6), which is one of the suspended 65 projects. Nevertheless, Fitch expects the issue to be resolved by the end of 2010. The impact would be lessened, if GSP#6 and a 300,000 tpy of HDPE new capacity are excluded from the 19 harmful business list in which it is drafted by the four-party committee and to be sent to get approval from the Cabinet by June 2010.
Negatively ratings triggers include a prolonged or deeper-than-expected industry downturn, higher debt-funded investment, as well as higher-than-expected financial leverage (adjusted net debt to EBITDAR of above 2.0x on a sustained basis). On the other hand, a significant improvement in product-to-feed margins, consistent improvement in profitability, and sustained positive free cash flow and low financial leverage could positively affect the ratings.
Applicable Criteria available on Fitch’s website at www.fitchratings.com: ‘Corporate Rating Methodology,’ dated November 24, 2009; and ‘Rating Chemical Company’, dated May 13, 2010.
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Contacts: Ekapan Prompraphant, Lertchai Kochareonrattanakul, Vincent Milton, Bangkok, +662 655 4755.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.