RPT-Fitch Affirms Thailand's PTTGC at 'AA(tha)'; Outlook Stable

Mon Jun 30, 2014 6:45am EDT

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June 30 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings (Thailand) Limited has affirmed PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating at 'AA(tha)', National Short-Term Rating at 'F1+(tha)', and the National Long-Term Rating on its senior unsecured debentures at 'AA(tha)'. The Outlook is Stable.

Fitch has simultaneously assigned PTTGC's upcoming THB10bn senior unsecured debentures due in 2021 a National Long-Term Rating of 'AA(tha)'. The proceeds will be used to refinance debt and fund future capex. The notes are rated at the same level as PTTGC's National Long-Term Rating as they constitute direct, unsecured, unconditional and unsubordinated obligations of the company.

Key Rating Drivers

Strong cash flow generation: Fitch expects PTTGC's funds from operations (FFO) to continue to be robust at over THB50bn a year to FY18, although we expect EBITDA to be below THB50bn in 2014 due mainly to weak product-to-feed margins of paraxylene (PX). Cash flow generation should improve in 2015-2016, supported by higher contributions from ongoing margin-improvement projects and capacity expansion from debottlenecking. The projects are expected to add to the company's margins to 2017 based on investments to be undertaken during this period.

Large capex, but flexible: The committed capex of USD2.3bn (THB72bn) over 2014-2018 can be comfortably managed within PTTGC's operating cash generation. The company has further uncommitted capex amounting to USD4.5bn (THB142bn) in its five-year investment plan; such uncommitted spending can be deferred if market conditions weaken. In addition, Fitch believes PTTGC's current low financial leverage (FFO net adjusted debt of 1.4x in 2013) and its strong operating cash generation provide reasonably good headroom for a capex programme much larger than its current committed capex.

Maintaining low leverage: Fitch expects PTTGC's FFO adjusted net leverage to be around 1.5x in 2014 and over the next three years, if taking into account both committed and some uncommitted capex (around 1.x only if the committed capex is taken into consideration). The company has strong liquidity with cash and cash equivalents of THB48bn at end-March 2014 and also benefits from a well-spread debt maturity profile and good access to sources of funds.

Fully integrated, low-cost producer: PTTGC is Thailand's largest fully integrated petrochemical and refining company. The company has a wide product range and benefits from its large operating scale. Furthermore, PTTGC benefits from competitive feedstock costs as most of its feedstock for olefins is gas-based, which is available domestically and is cheap relative to naphtha. PTTGC also benefits from a favourable feedstock supply arrangement with its major shareholder PTT Public Company Limited (PTT, 49% ownership, AAA(tha)/Stable), which reduces margin volatility in times of variable market conditions.

Linkage with PTT: PTTGC's rating benefits from a one-notch uplift to its standalone credit profile, reflecting its strategic importance to and operational links with PTT. PTTGC is PTT's major off-taker of both gas products and condensate, and leads the petrochemical business expansion domestically and internationally within the PTT group. PTTGC is the largest earnings contributor to PTT among its downstream affiliates. The rating uplift has been limited to a single notch as some of the benefits from its association with parent, such as the gas supply arrangements, are reflected in its strong standalone profile.

Highly cyclical business: PTTGC's credit profile is tempered by its vulnerability to the highly cyclical petrochemical sector and fluctuations in refining margins and crude oil prices resulting in volatile margins and operating cash flow generation.

Rating Sensitivities

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

- evidence of stronger ties with PTT

- a positive rating action on the company's standalone rating is unlikely in the medium term given PTTGC's large capex plans and long lead times in cash generation from these investments

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

- a sustained increase in leverage, as measured by FFO adjusted net leverage, to above 1.5x due to large debt-funded investments or persistently low refining margins and petrochemical spreads

- weakening of linkages with PTT

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