(The following statement was released by the rating agency)
Nov 23 -
Summary analysis -- PT Chandra Asri Petrochemical Tbk. ------------ 23-Nov-2012
CREDIT RATING: B+/Stable/-- Country: Indonesia
Primary SIC: Chemical
Credit Rating History:
Local currency Foreign currency
22-Oct-2009 B+/-- B+/--
The rating on Indonesia-based petrochemical producer PT Chandra Asri Petrochemical Tbk. (CAP) reflects the cyclical nature of the commodity chemicals business, volatile feedstock costs, and the company's limited operational diversity. CAP's leading market position in Indonesia, favorable medium-term domestic demand, cost advantages from its domestic vertically integrated facilities, and moderate leverage partly offset the above weaknesses. We assess the company business risk profile as "weak" and its financial risk profile as "aggressive."
We expect CAP's financial performance in 2012 to be weak because olefin and polyolefin prices remain subdued and raw material costs are elevated. We estimate the company's EBITDA margin to decline to about 1% (EBITDA of US$25million-US$30 million) in 2012, from 4% in 2011. We expect its debt-to-EBITDA ratio to climb to more than 10x for the year, from about 3.3x in 2011.
Polyolefin spreads will recover modestly in 2013, in our opinion. This, along with a ramp-up in CAP's butadiene facility should result in the company's EBITDA margin increasing toward 3% in 2013 and its debt-to-EBITDA ratio improving to 4.0x-4.5x. We forecast CAP's ratio of funds from operations (FFO) to debt at 15%-20% in 2013. Interest cost savings along with improved EBITDA should however translate into EBITDA interest coverage of 3.5x-4.0x in 2013, commensurate with our expectation for the rating. This is an improvement from our estimate of EBITDA interest coverage of about 1.0x in 2012. Our base-case financial projections assume about US$30 million in residual capital spending in 2013 and no further debt-funded capacity expansion in CAP's petrochemical business in 2013 and 2014.
CAP's refinancing of its US$185 million outstanding bonds in October 2012 with lower cost bank loans supports the company's liquidity, in our view. While absolute debt should increase by about US$30 million, the refinancing improves CAP's debt maturity profile, with minimal amortization over the next 24 months. We also estimate that the company will save about US$15 million a year in interest expenses. CAP also negotiated a relaxation of its interest service coverage covenant to 1.75x from 2.0x in October 2012, which provides an adequate buffer under this covenant in the current weak operating environment.
CAP's liquidity is "adequate," as defined by our criteria. Given the cyclical nature of its business, the company's cash flows are highly volatile. Nevertheless, we expect CAP's sources of liquidity, including cash and available facilities, to exceed its uses by about 1.2x or more in the next 12 months. Our assessment of CAP's liquidity profile incorporates the following expectations and assumptions:
-- Liquidity sources include US$103.8 million of cash and cash equivalents as of Sept. 30, 2012. We also include FFO of US$30 million-US$40 million over the next 12 months.
-- We believe liquidity sources will remain positive even if EBITDA declines by 15%, given the large proportion of cash on the company's balance sheet.
-- Liquidity needs include about US$10 million in short-term debt and about US$103,000 in finance lease obligations.
-- We also factor in capital expenditure of about US$30 million-US$40 million in 2013.
The stable outlook on CAP reflects our expectation that the company's profitability and cash flow adequacy will improve in 2013.
We may lower the rating if CAP's cash flow deteriorates significantly such that its FFO-to-debt ratio is below 15%. This could happen if: (1) CAP's margin is weaker than we expect, with gross profit per ton of petrochemical products sold, excluding depreciation and amortization, below US$60 for more than 12 months; or (2) the company's debt-funded capital spending exceeds our expectation.
We may raise the rating if CAP improves its business risk profile--such that it can mitigate the cyclicality in its business--and maintains its financial risk profile. The improvement could include a diversification in markets and products with independent business cycles and different end markets, and a reduction in site concentration risk.