TRIS Rating has affirmed the company rating of Indorama Ventures PLC (IVL) and the ratings of IVL’s senior unsecured debentures at “A+”. At the same time, TRIS Rating has also affirmed the rating of “A-” to IVL’s subordinated capital debentures. The outlook remains “stable”. The two notches below the corporate credit rating of IVL reflect the interest payment deferability and deep subordination characters of subordinated capital debentures.
The ratings of IVL and its debentures reflect the company’s strong position as a leading worldwide producer in the polyester value chain, its competitive cost position, and efficient productivity stemming from a vertically integrated process along the polyester value chain, plus its geographically diverse customer and production base spanning over 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, an ongoing oversupply of purified terephthalic acid (PTA) in Asia, and the uncertain outlook of the global economy, which is pressuring the company's profitability. In addition, the company’s balance sheet has been constrained by its investment plans, which are largely financed with debts.
The “stable” outlook is based on TRIS Rating’s assumption that the industry margin will gradually recover from the current level. In addition, IVL will be able to demonstrate more stable cash flow generation and maintain sufficient liquidity to act as a cushion against the volatility inherent in the petrochemical industry. The negative factor for the rating could be a prolonged industry down cycle, which will deteriorate IVL's profitability and will finally reduce the FFO to total debt ratio below 15% on the sustainable basis.
The upside factor for IVL’s ratings could occur if the company's cash flow generation improves significantly and the FFO to total adjusted debt ratio increases over 25% on a sustainable basis.
IVL was established by the Lohia family on 21 February 2003 as a holding company and was listed on the Stock Exchange of Thailand (SET) on 5 February 2010. Currently, the Lohia family holds a 66.4% stake in IVL. The company invests mainly in businesses along the polyester value chain. As of 30 June 2015, IVL’s total installed capacity was 8.5 million tonnes per annum (MTA), of which 49% was polyethylene terephthalate (PET), 27% was PTA, 18% was polyester fiber equivalent, and 6% was monoethylene glycol (MEG) equivalent. In the polyester value chain, PTA and MEG are the major feedstocks used to produce PET and polyester fiber.
As of June 2015, IVL’s facilities were located in 19 countries across four continents: Asia, Europe, North America, and Africa. IVL’s business model is aimed at full vertical integration and a diversified presence around the globe. This model should enhance the company’s profitability and competitive advantage, as well as reduce the risk associated with the volatility of the petrochemical industry and trade barriers. In the first six months of 2015, the company spent about Bt16,000 million to conclude four acquisition transactions. The acquisitions increased IVL’s total capacity from 7.5 MTA in 2014 to 8.5 MTA in the first half of 2015. The acquisitions included a high value added (HVA) yarns production facility in China, PET plants in Turkey and Thailand, and a PTA plant in Canada.
For the first six months of 2015, IVL’s total revenue was Bt114,886 million, a 9% year-on-year (y-o-y) decrease, mainly due to a lower average selling price. An increase in sales volume could not offset the drop in the average selling price. The average selling price fell because of the large drop in oil prices since the second half of 2014. The operating margin (operating income before depreciation and amortization, as percentage of sales) has gradually improved, rising from 5% in 2013 to 8.1% in the first six months of 2015. The rise partly reflects an improving in the PTA margin, and the mix of HVA products in IVL’s portfolio. In 2013, HVA production accounted for about 19% of total production, rising to about 22% for the first six months of 2015. IVL’s profitability, in terms of earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne of production volume, improved from US$79 per tonne in 2014 to US$96 per tonne in the first six months of 2015. For the first six months of 2015, the company generated funds from operations (FFO) of Bt8,942 million, while the EBITDA interest coverage ratio (adjusted to include hybrid debentures) was 5.1 times (annualized with trailing 12 months).
At the end of June 2015, the company’s total adjusted debt for hybrid debentures (total adjusted debt) was Bt86,468 million and the total adjusted debt to capitalization ratio was 54.3%. Looking forward, the company’s debt is expected to increase due to its acquisition plans. TRIS Rating’s base case scenario has incorporated the company’s acquisition budget and capital expenditure plans of about Bt117,000 million spending over 2015-2018. IVL plans to expand some of its existing plants and improve the HVA production line. The acquisition budget includes Bt16,000 million that was already spent in the first half of 2015 and the company’s recent announcement that it will acquire a 0.4 MTA ethylene cracker in the United States (US). With its investment and capital expenditure budget, the company’s total installed capacity will increase from 8.5 MTA to about 11.8 MTA by 2018. The production capacity for HVA products will further increase from about 22% of the current total production to 24%-25% by 2018. TRIS Rating expects that IVL will keep the leverage level to maintain the ratio of net interest bearing debt to equity at lower than 1 times, in accordance with the company’s policy. Based on the expected mix of HVA products and the gradual recovery of the industry margin, TRIS Rating's projection expects the company's profitability in terms of EBITDA per tonne of production will increase over US$100 per tonne. The company’s FFO is expected to exceed Bt20,000 million in 2016 and increase further for the following years, due to the increases in profitability and capacity. This level of FFO is sufficient to service IVL’s debt obligations. Approximately Bt10,000 million in debt will come due in 2016, while the Bt13,000-Bt14,000 million debts will be due annually during 2017 and 2018. The FFO to total adjusted debt ratio is expected to range 15%-23% over the next three years.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2015, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.