TRIS Rating has assigned a rating of “A+” to the proposed issue of up to Bt2,500 million in senior debentures of Indorama Ventures PLC (IVL). At the same time, TRIS Rating has affirmed the company rating of IVL and the ratings of its current senior debentures at “A+”. The outlook remains “stable”. The proceeds from the debentures will be used mainly for debt refinancing. The ratings reflect the company’s strong position as a leading worldwide producer in the polyester value chain, its cost competitiveness, its reliable production base due to vertical integration, plus its geographically diverse customer base which spans the globe. The ratings also take into consideration the capability and experience of the management team, as well as IVL’s access to key technologies. However, the ratings are constrained by the volatile nature of the petrochemical industry, the uncertain global economy, an oversupply of purified terephthalic acid (PTA) and polyethylene terephthalate (PET) in Asia, and the sizable investments that IVL has made in search of growth. The investments may strain the company’s balance sheet. The “stable” outlook reflects the expectation that IVL will be able to demonstrate more stable operating performance and benefit from its diversification efforts and vertical integration. The company is also expected to maintain its financial strength and sufficient liquidity to cushion the volatility inherent in the petrochemical industry.
IVL, formerly named Beacon Global Co., Ltd., was established by the Lohia family on 21 February 2003 as a holding company. IVL was listed on the Stock Exchange of Thailand (SET) on 5 February 2010. Current, the Lohia family holds 66.4% stake in IVL. The company invests mainly in businesses along the polyester value chain, comprising the production of monoethylene glycol (MEG), PTA, PET, and polyester fiber and yarn. Currently, IVL’s total installed capacity is 6,780 thousand tonnes per annum (KTA), comprising 550 KTA of MEG equivalent, 1,761 KTA of PTA, 3,593 KTA of PET, and 876 KTA of polyester fiber equivalent. Along the polyester value chain, PTA and MEG are the major feedstocks used in producing PET and polyester fiber. PET is used to produce a wide range of packaging for beverages, food products, personal care and home care products, and pharmaceuticals, as well as other consumer and industrial products. Polyester-based products have a broad range of uses across many industries, such as apparel, home textiles, non-wovens, technical textiles, and automotive uses.
At present, IVL’s facilities are located in 15 countries across four continents: Asia, Europe, North America, and Africa. IVL’s successful growth record is owed in part to its low-cost acquisitions of distressed assets, intense management commitment to production efficiency, and ability to leverage the various key technologies in the polyester value chain. In addition, IVL’s presence in key geographic regions enhances its access to a worldwide customer base, which in turn yields high production utilization. IVL has a reliable manufacturing base. The reliability of IVL’s production is supported by two factors: secure sources of feedstock via captive use, and virtual integration through co-location of production facilities with major suppliers. These factors enable IVL to offer competitive prices to customers, due to lower production and logistics costs. The placement of its production facilities at locations around the globe helps the company overcome trade barriers in some competitive markets, such as North America and Europe. IVL’s business model of fully vertical integration and diversified presence across the globe should provide some cushion and a competive advantage to mitigate the risk associated with petrochemical industry. However, a recent influx of new production capacity in China and fragile global economy has raised the specter of intensified competition in the near future.
IVL’s financial profile remained under pressure because of the current down cycle of the petrochemical industry, however it is expected to improve in the medium term. In the first quarter of 2013, IVL reported total revenue of Bt55,494 million, a 5.7% year-on-year (y-o-y) increase, mainly due to higher sales volumes. However, operating income before depreciation and amortization, as percentage of sales, declined from 5.7% in 2012 to 5.2% in the first quarter of 2013. The drop was mainly due to the intense competition among PTA producers in Asia, topped by the softer margins for MEG and polyester fiber. A higher margin for PET could not offset the lower margins for MEG and polyester fiber. IVL’s profitability, in terms of earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne of production volume, dropped from US$86 per tonne in 2012 to US$73 per tonne for the first three months of 2013. IVL’s operating margin remained under pressure because of the continued oversupply of PTA in Asia and the unresolved economic crisis in Europe. The company generated funds from operations (FFO) of Bt2,356 million in the first three months of 2013. The EBITDA interest coverage ratio was 3.1 times in the first quarter of 2013.
The IVL’s acquisitions, during 2011 through the first half 2012, has pressured on IVL’s balance sheet. Total debt increased from Bt32,068 million at the end of 2010 to Bt80,751 million at the end of March 2013. The rise in debt included debt-financed investments, the consolidation of the debt of acquired subsidiaries, and greater working capital financing. As a result, the total debt to capitalization ratio increased from 49.9% at the end of 2010 to 59.9% at the end of March 2013. The company has suspended its acquisition plans until 2014 due to the unfavorable economic conditions. A temporary halt in IVL’s investment plans will help improve the company’s capital structure. However, IVL has continued with its existing expansion projects as planned, including a PET capacity expansion project in the US (the Alphapet 2 project). This organic growth will boost IVL’s total capacity to approximately 8,000 KTA by 2016.
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