TEXT-Fitch affirms Petkim at 'B+'; revises outlook to negative
(The following statement was released by the rating agency)
Dec 27 - Fitch Ratings has affirmed Petkim Petrokimya Holdings A.S. (Petkim)'s Long-term foreign and local currency Issuer Default Rating (IDRs) at 'B+' and National Long-term rating at 'A-(tur)'. The agency has revised the Outlook on the Long-term IDRs to Negative from Stable.
The IDRs incorporate a one-notch uplift for support from State Oil Company of the Azerbaijan Republic (SOCAR; 'BBB-'/Stable), Petkim's main shareholder.
The revision of the Outlook reflects Fitch's concerns about Petkim's weak credit metrics as of end-Q312 and about its ability to sustain the recovery in operating cash flow and margins observed in H212, amid forecasts of lacklustre demand and increased volatility for the petrochemicals sector in 2013.
Weak Cost Position
Petkim's financial underperformance in 9M12 highlights its vulnerability to cyclical downturns and its weak cost position. The group's results in 2012 are likely to compare poorly with Fitch's previous forecasts, despite the agency's pre-existing assumptions of margin erosion and downward pressure on the credit metrics. Reported EBITDA margin dropped to 0.9% in 9M12 from 8.1% a year earlier. Fitch's revised base case for 2012 incorporates a sequential recovery in profitability Q312 and Q412 but projects EBITDA margin at 1.6% for the full year.
Essential Capex Delayed
Petkim's reduced operating cash flow generation constrains its ability to implement de-bottlenecking and expansionary investments, which Fitch regards as crucial to defend its competitive position. Capex for 2012 has been revised down to USD50m from USD171m budgeted at the start of the year. Similarly, capex for 2011 was reduced to USD90m against an initial budget of USD131m. Fitch understands that the group has also postponed some of its projects (ethylene and PTA capacity increases) to fully assess the implications of the new investment incentive package designed by the Turkish government in 2012.
Working Capital Swings
Petkim was able to maintain healthy cash balances aided by lower capex and working capital inflows (mainly increased accounts payables). The Negative Outlook captures uncertainties about the sustainability of these movements, particularly as Petkim's naphtha bill also results in material swings in working capital. The group held TRY186m in cash at end-Q312 against debt of TRY277m, 88% of which consisted of short-term credit lines from banks.
The rating base case assumes that the working capital bank lines will be rolled over. Fitch also assumes an increase in capex to around USD115m in 2013. The working capital relief of 2012 is not expected to be repeated and the base case forecasts negative free cash flow with a gradual increase in net debt. Under Fitch's revised base case for 2012, gross funds from operations (FFO) leverage is projected at 2.2x (2.3x at end-2011) and declines thereafter as profitability improves. The group's higher debt burden renders it increasingly vulnerable to a further deterioration in market conditions.
Challenging Market in 2013
Amid weak global macroeconomic conditions and sluggish demand in Europe in 2013, Fitch forecasts lower average demand and prices for petrochemicals in 2013, intensifying competition in Turkey. This is only partly mitigated by the increase in custom duties on LDPE, PP and HDPE in Turkey for Middle Eastern, US and Far Eastern importers. The rating base case projects no revenue growth and some margin improvement resulting from some of the energy efficiency projects . In particular, Fitch believes that Petkim's cost base will benefit from the recent agreement with Socar Power for the supply of natural gas at lower prices.
The rating uplift is in line with Fitch's "Parent and Subsidiary Rating Linkage" methodology and is underpinned by the cross default clause to "any member of the group" under SOCAR's debut five-year USD500m Eurobond (February 2012). Fitch also factored in the increasing strategic ties, as illustrated by SOCAR's acquisition of additional stakes in Petkim from Turcas, from the Privatisation Administration and from the market, and by the start of the works on the USD5bn greenfield refinery (no financial contribution from Petkim).
RATING SENSITIVITY GUIDANCE:
Negative: Future developments that could lead to negative rating action include:
- A visible and prolonged deterioration in profitability with EBITDA margin eroding below 5%
- Any large debt financed investments or dividend payments resulting in a sustained FFO leverage ratio above 4.0x
- Evidence of weakening support from SOCAR or a deterioration in SOCAR's credit standing
- A marked deterioration in the group's liquidity position
The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. Future developments that may nonetheless potentially lead to a positive rating action include:
- Fundamental and material improvements in Petkim's business profile and cost position relative to peers could warrant a positive rating action. This is not currently envisaged in the rating horizon.
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