Fitch Rates PTT Global Chemical#s Debentures #AA+(tha)#

Stocks and Financial Services Press Releases Thursday August 22, 2019 14:57
Bangkok--22 Aug--Fitch Ratings
Fitch Ratings (Thailand) has assigned a National Long-Term Rating of 'AA+(tha)' to PTT Global Chemical Public Company Limited's (PTTGC, AA+(tha)/Stable) new senior unsecured debentures.

The debentures of up to THB10 billion will be issued in three tranches with tenors of five, seven and 10 years. They are rated at the same level as PTTGC's National Long-Term Rating in line with its other senior unsecured obligations. Proceeds will be used as working capital, to refinance existing debt and to fund capex.

KEY RATING DRIVERS

Linkage with Parent: PTTGC's National Long-Term Rating incorporates a two-notch uplift from its Standalone Credit Profile (SCP) of 'aa-(tha)', reflecting its moderate links with its parent, PTT Public Company Limited (PTT; AAA(tha)/Stable). PTTGC is a major component of the parent's petrochemical and refining (P&R) business, which is highly important as the segment accounted for around 31% of group total revenue in 2018. The segment also made the second-largest EBITDA contribution of 28% after the exploration and production business (36%). PTTGC is strategically important to PTT's P&R business as a major feedstock off-taker amid its flagship status as the group's key petrochemical producer.

Lower Earnings in 2019: Fitch expects PTTGC's EBITDA to drop to about THB50 billion in 2019, from THB57 billion in 2018, due to lower petrochemical-product spreads and a falling gross refinery margin. We also believe sales volume may decline due to PTTGC's planned maintenance shutdown of its Aromatics Complex I and a refinery plant during the year.

High Capex: We forecast free cash flow (FCF) to turn negative in 2019 as operating cash flow is unlikely to cover capex and dividend payments. Fitch expects capex to increase to around THB43 billion in 2019, from THB33 billion in 2018, to support the construction of a propylene oxide and polyols project and an olefins reconfiguration project (ORP). FFO adjusted net leverage is likely to increase to around 1.5x-1.6x, from 0.9x in 2018, before dropping to around 0.6x-1.1x in 2020 and 2021 on lower capex after the company finishes its major investments.

New Capacity; Volume Growth: PTTGC's sales volume should increase in the medium term, driven by new petrochemical capacity. The company started operations at its 434,000 tonne per annum (tpa) liner low-density polyethylene plant and hexane-1 plant in 1Q18 and its 200,000 tpa methyl ester plant 2 in 1Q19. The propylene oxide and polyols project and the ORP, which will be in operation in 2020, will also help drive the company's growth.

Fully Integrated, Low-Cost Producer: The company's large operating scale, wide product range and high utilisation rate result in larger operating cash flow and a higher operating margin than those of domestic P&R peers. PTTGC benefits from cost-competitive feedstock as the majority of its olefins feedstock is gas-based and available domestically. It also has a favourable gas-supply agreement with its parent, PTT, which reduces margin volatility when market conditions fluctuate.

Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the P&R sector. The volatility of product-to-feed margins, refining margins, feedstocks prices, oil prices and working-capital requirements could affect PTTGC's earnings and cash-flow generation significantly. PTTGC is also exposed to supply concentration risk as the majority of its feedstock is secured from PTT. This is mitigated by PTT's strong credit profile and position as Thailand's leading oil and gas company.

DERIVATION SUMMARY

PTTGC's National Long-Term Rating incorporates a two-notch uplift from its SCP, reflecting moderate linkages with PTT. PTTGC is PTT's largest petrochemical subsidiary and flagship company in the petrochemical business, which was evident from the injection of PTT's petrochemical assets into PTTGC in 2017. PTTGC benefits from a gas-supply agreement with PTT, leading to competitive feedstock cost. The favourable product offtake agreements with PTT also help reduce the margin volatility of its petrochemical products.

PTTGC's SCP reflects its large operating scale and integration along the petrochemical value chain, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers and its financial leverage is low. PTTGC has larger operating scale, more integration into petrochemicals and higher profitability than Thai Oil Public Company Limited (AA(tha)/Stable, SCP: a+(tha)). PTTGC's operations and diversification are larger than that of IRPC Public Company Limited (A(tha)/Stable, SCP: bbb+(tha)). In addition, it has a stronger balance sheet and better operating profit margin.

KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
  • Benchmark Brent crude price at USD65.0/barrel (bbl) in 2019, USD62.5/bbl in 2020, USD60.0/bbl in 2021 and USD57.5/bbl thereafter, with PTTGC's crude-procurement cost adjusted for applicable premiums
  • Market-refining margin to soften in 2019
  • Aromatic segment's profitability to soften slightly in 2019 and stay broadly flat thereafter
  • Olefin and derivative segment's profitability to soften slightly in 2019 and gradually improve thereafter
  • THB107 billion of capex over 2019-2023, including committed capex, investment and maintenance costs
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
  • Evidence of stronger ties with PTT
  • Positive action on PTTGC's SCP is unlikely in the medium-term due to its modest scale by global standards and high exposure to the commodity-petrochemical business
Developments that May, Individually or Collectively, Lead to Negative Rating Action
  • A sustained rise in leverage, measured by FFO adjusted net leverage, to above 2.0x due to large debt-funded investments or persistently thin refining margins and petrochemical spreads
  • Weakened ties with PTT
LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: PTTGC has strong liquidity, supported by high non-restricted cash and cash equivalents of THB51.7 billion at end-2018. This was more than adequate to cover THB8.3 billion of debt maturing in 2019 and the likely negative FCF. Debt repayments will increase over the next three years, with large repayments in 2021-2022, when THB20 billion of Thai baht bonds and USD1 billion of US dollar notes are due. Liquidity is reinforced by PTTGC's strong FCF generation and ability to raise funds in the capital markets, supported by low financial leverage.


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