The CreditWatch placement reflects our concerns that the increasing funding requirement for the company's proposed supply chain restructure is likely to pressure Caltex's credit metrics in the next few years. The company has announced that it may seek funding through a hybrid issuance, and that it will have a lower dividend payout ratio of 20% to 40%, from 40% to 60%. In our view, a potential hybrid issuance, in the absence of any adjustment to the dividend payout or other financial levers, may not be sufficient to maintain Caltex's credit metrics at levels consistent with the 'BBB+' rating. Therefore, Caltex's "modest" financial risk profile is likely to deteriorate to the "intermediate" level, according to our criteria. In addition, without a conservative balance sheet, Caltex's credit metrics would be more susceptible to adverse trading conditions during the transition period from July 2012 to end of 2014. Negative conditions could arise from any unplanned outages, significant weakening in Caltex's refiner margin, or increased costs of the proposed refinery closure.
Nevertheless, Caltex's business risk profile would benefit from the restructure, in our view. The anticipated favorable supply agreement with Chevron Corp. (AA/Stable/A-1+) and the closure of the Kurnell refinery would reduce Caltex's operating losses in its refinery business and the volatility in its earnings and operations. However, given the execution risks associated with the restructuring, our view of Caltex's "satisfactory" business risk profile remains unchanged.
We expect to resolve the CreditWatch in the next three months after we assess Caltex's funding strategy, including the execution of the hybrid issuance and the specifics on dividend reduction and other financial levers. To maintain its 'BBB+' rating, we expect Caltex's adjusted FFO-to-debt to remain well above 40% and adjusted debt-to-EBTIDA lower than 2x. We also expect Caltex to generate positive free operating cash flow. If Caltex were to implement sufficient financial levers to maintain its prospective credit metrics, the rating could be affirmed. The rating outlook could be stable or negative depending on the buffer in their ratings.
If a downgrade were to occur, we believe that it's likely to be limited to one notch. We don't expect the deterioration of Caltex's financial risk profile to be more than to the "intermediate" category.
Related Criteria And Research
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Caltex Australia Ltd.
Corporate Credit Rating BBB+/Watch Neg/A-2 BBB+/Stable/A-2
Caltex Australia Ltd.
Senior Unsecured BBB+/Watch Neg BBB+