TEXT-Fitch affirms Thailand's IRPC at 'A-(tha)'; outlook stable

Wed Jan 30, 2013 3:22am EST

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(The following statement was released by the rating agency)

Jan 30 - Fitch Ratings (Thailand) Limited has affirmed IRPC Public Company Limited's (IRPC) National Long-Term rating at 'A-(tha)' with a Stable Outlook. Fitch has also affirmed its National Short-Term rating at 'F2(tha)' and its senior unsecured debentures at National Long-Term 'A-(tha)'.

Fitch has assigned a one notch uplift from IRPC's standalone credit profile, reflecting the growing strategic importance of IRPC and its operating links with PTT Public Company Limited (PTT, 'AAA(tha)'/Stable), aside from PTT being the single largest shareholder of IRPC with a 39% interest. However, because Fitch has also downgraded IRPC's standalone rating to 'BBB+(tha)' from 'A-(tha)' due to deterioration in its credit profile, the headline rating of IRPC, following the PTT uplift, is unchanged at 'A-(tha)'.

Linkages between IRPC and PTT have increased for the past two years; these include IRPC now being part of PTT's central treasury management framework, rotation of key management among PTT and its related companies, including IRPC, as well as flexible credit terms from PTT. IRPC is one of PTT's key refining and petrochemical companies and Fitch does not rule out the possibility that IRPC may be merged with a large downstream affiliate company of PTT in the future.

IRPC's standalone credit profile has weakened in the last nine months and its financial leverage is expected to remain elevated in the short- to medium-term. This reflects weak operating cash flow, higher-than-expected debt in 2012, and a softer outlook of the petrochemicals and refining business in the next 12 to 18 months. Fitch expects IRPC's funds flow from operations (FFO) adjusted net leverage to be around 3.5x-4.25x in 2013-2016 (2011: 2.7x), exceeding the agency's previous expectations.

IRPC plans to spend USD2.1bn in 2012-2016 to improve asset utilisation and increase its capacity and product range. The increased capex plan will exert additional pressure on IRPC's credit metrics during this investment phase, although Fitch views that IRPC has some flexibility on the timing of its capex.

Fitch expects IRPC to benefit from better credit terms on purchases of crude in 2013, easing its working capital requirements. This will support IRPC's liquidity and lower the need for incremental debt during the heavy investment period in 2013-2014.

IRPC's standalone credit profile reflects its competitive advantage as a fully integrated oil refining and petrochemicals producer, and its expertise and the long track record in downstream petrochemical products in Thailand. IRPC's vertical integration provides cost advantages, a broad product range and reduced earnings volatility relative to non-integrated operators. Its refinery is less complex in its configuration relative to some of the other large refiners in Thailand. However, an increase in high value-added products with the proposed investments should improve its margins and reduce margin volatility.

IRPC's credit profile is constrained by its vulnerability to oil prices, and by volatile refining margins and petrochemical prices, which can significantly affect its earnings and cash flow generation. The ratings also take into account the company's aggressive investment plan, and its reliance on exports due to Thailand's excess capacity in polymers (about 58% of the country's production was exported in 2011). Furthermore, IRPC is exposed to supply risks associated with crude oil, as Thailand is highly dependent on imported oil.

What could trigger a rating action?

Positive: Future developments that may, individually or collectively, lead to positive rating action include

-maintaining leverage, as measured by FFO adjusted net leverage, below 3.25x on a sustained basis

-evidence of stronger ties with PTT

Negative: Future developments that may, individually or collectively, lead to negative rating action include,

-persistently low refining and petrochemical margins

-higher-than-expected debt-funded investments leading to a sustained increase in leverage, as measured by FFO adjusted net leverage, to over 4.25x

-weakening of linkages with PTT

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