Fitch Ratings (Thailand) has assigned a 'AA+(tha)' rating to PTT Global Chemical Public Company Limited's (PTTGC; AA+(tha)/Negative) proposed senior unsecured debentures of up to THB25 billion.
The proposed debentures constitute direct, unsecured, unconditional and unsubordinated obligations of the company and are rated at the same level as PTTGC's National Long-Term Rating in line with its other senior unsecured debt. The proceeds will be used as working capital, to refinance existing debt and to fund capex and investment.
KEY RATING DRIVERS
Continued Deleveraging: Fitch expects PTTGC's leverage to decrease to around 2.6x in 2022 and 2.2x in 2023 after it increased to 3.1x at end-2021 following the acquisition of Allnex Holding GmbH in 4Q21. The deleveraging is based on Fitch's expectation that PTTGC will apply free cash flow (FCF) of around THB20 billion a year for debt repayment during the period.
However, risk to deleveraging includes a further large debt-funded acquisition. PTTGC's M&A appetite has increased over the past few years to support its target to raise the earnings contribution from performance chemicals to 35% by 2030 (2021: around 10%). The credit profile could weaken if the company deploys cash towards large M&A before building up enough headroom to do so.
More Diversification: The Allnex acquisition is aligned with PTTGC's strategy to diversify into high-value products and the specialty chemical business, which have been more insulated than commodity products during the downturn due to more resilient end-market demand. Fitch expects EBITDA contribution from PTTCG's performance chemicals will increase to around 16%-17% after the acquisition from around 10% currently, supporting improvement in the business profile.
Allnex will also provide access to the US and European markets, where PTTGC has limited exposure, and reinforce its well-established position in Asia. We believe the acquisition will add stability to PTTGC's earnings and enhance its overall EBITDA margin by around 1%-2%. Allnex is a leading specialty chemical resin producer for the coating industry with a diverse product portfolio and exposure to several industrial end-markets.
Earnings to Soften: Fitch expects PTTGC's EBITDA (excluding Allnex) to fall to about THB45 billion in 2022 (2021: THB58.6 billion) in the absence of large stock gains and weaker petrochemical spread, but remain strong relative to 2019-2020. Petrochemical spreads are likely to moderate in 2022 on new supply and slower demand growth. Market gross refining margins (excluding inventory gains) are likely to improve in 2022 from 2021 on higher travel and economic activity.
Linkages with PTT: PTTGC's 'AA+(tha)' National Long-Term Rating incorporates a two-notch uplift from the Standalone Credit Profile (SCP) of 'aa-(tha)', reflecting our view that parent PTT Public Company Limited (PTT, BBB+/AAA(tha)/Stable) has 'Medium' incentives to support PTTGC under Fitch's Parent and Subsidiaries Linkage Rating criteria.
Fitch believes the petrochemical and refinery business, in which PTTGC is a major component, is strategically important to PTT. PTTGC is also PTT's major feedstock off-taker, as it is the group's flagship petrochemical producer. This underpins our assessment of 'Medium' strategic and operational incentives. The legal incentives are assessed as 'Weak'.
Fully Integrated, Low-Cost Producer: A large operating scale, wide product range and high utilisation rate result in higher operating cash flow and a wider operating margin than those of domestic petrochemical and refining peers. PTTGC also benefits from cost-competitive feedstock, as the majority of its olefin feedstock is gas-based and available domestically. It also has a favourable gas-supply agreement with its parent, which reduces margin volatility when market conditions fluctuate.
Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the petrochemical and refinery sectors. The volatility of product-to-feed margins, refining margins, feedstock prices, oil prices and working-capital requirements could significantly affect PTTGC's earnings and cash-flow generation. PTTGC is also exposed to supply concentration risk, as the majority of its feedstock is secured from its parent, PTT. This is mitigated by PTT's strong credit profile and position as Thailand's leading oil and gas company.
DERIVATION SUMMARY
PTTGC is PTT's largest petrochemical subsidiary and flagship in the petrochemical business, which was evident from the injection of PTT's petrochemical assets into PTTGC in 2017. PTTGC's SCP reflects its operating scale and high integration with petrochemicals, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers, while its financial leverage is also lower.
PTTGC has a larger operating scale and more integration in petrochemicals than Thai Oil Public Company Limited (TOP, A+(tha)/Negative). It also has higher profitability than TOP. PTTGC's operations and diversification are much larger than that of IRPC Public Company Limited (A-(tha)/Stable). In addition, PTTGC has a stronger balance sheet and wider operating profit margin than IRPC.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Benchmark Brent crude price at USD100/barrel in 2022, USD80/barrel in 2023, USD60/barrel in 2024 and USD53/barrel in 2025 and thereafter, with PTTGC's crude procurement costs adjusted for applicable premiums;
- Profitability of olefins to drop in 2022 as new supply will pressure the petrochemical spread;
- Gross refining margin to improve during 2022-2023, as demand from transportation sector improves gradually;
- Extension of credit terms on crude supply from PTT to 90 days, from 30 days, in 2022 and thereafter;
- Capex and investment of around THB40 billion over 2022-2023;
- Dividend payout of 50% of consolidated net profit.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook could be revised to Stable if PTTGC is on track to reduce its FFO net leverage to below 2.5x by 2023;
- Evidence of stronger ties with PTT.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Failure to achieve the positive rating sensitivities;
- Weakened ties with PTT.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: PTTGC had outstanding debt of THB256 billion at end-2021, of which THB40.3 billion matures within 12 months. Liquidity is supported by unrestricted cash of THB74 billion. In addition, Fitch expects PTTGC to generate free cash flow of around THB20 billion a year over 2022 and 2023.
ISSUER PROFILE
PTTGC is the largest, fully integrated petrochemical and refinery company in Thailand and a flagship company under the PTT group. The combined petrochemical and chemical capacity was 14 million tonnes a year at end-2021 and crude oil and condensate distillation capacity was 280,000 barrels per day.
DATE OF RELEVANT COMMITTEE
21 July 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com