TRIS Rating affirms the company rating of Indorama Ventures PLC (IVL) and the ratings of IVL’s existing senior unsecured debentures at “A+”. TRIS Rating also affirms the rating of “A-” to IVL’s subordinated capital debentures. At the same time, TRIS Rating assigns the rating of “A+” to IVL’s proposed issue of up to Bt20,000 million in senior unsecured debentures. The proceeds from the new debentures will be used for its business expansion.
The ratings of IVL reflect the company’s leading position in the polyester value chain, competitiveness stemming from vertical integration, and geographic diversification in terms of production and customer base. The ratings also take into consideration the management team’s capability and experience, as well as IVL’s access to key technologies. However, the ratings are constrained by the volatile nature of the petrochemical industry.
In the first three months of 2018, IVL’s revenue increased by 6.3% (year-on-year) to Bt76.14 billion, mainly due to higher sales volume and price increases. IVL’s profitability also improved. The earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne increased from US$117 per tonne in the first three months of 2017 to US$148 per tonne in the first three months of 2018.
The total debt to capitalization ratio also improved from 56.5% at the end of 2016 to 46.9% at the end of March 2018. This was due to the debt prepayment of about Bt10 billion using the proceeds from the exercise of the warrants amounting to Bt15.5 billion in the third quarter of 2017.
In March 2018, IVL announced two transactions. The first was the acquisition of a Polyethylene Terephthalate (PET) plant in Brazil from M&G Chemicals Brazil S.A. IVL then announced to enter into a joint venture to acquire from M&G USA Corp. and its affiliated debtors an integrated Purified Terephthalic Acid (PTA) and PET plant in the United States (US), which is under construction. On 14 May 2018, IVL announced to acquire 65.7% shareholding in Avgol Industries 1953 Ltd (Avgol). Avgol is the global manufacturer of non-woven fabric solution for the diapers, incontinence and hygiene markets.
IVL plans to spend about US$1,054 million (Bt33.7 billion) in 2018 and about US$300 million (Bt9.6 billion) in 2019-2020 to complete construction of integrated plant in the US.
These acquisitions are in line with the company's business plan to expand its polyester value chain in both North and South America. The PET plant in Brazil has a capacity of 550,000 tonnes per annum and is expected to generate EBITDA of about US$60-US$70 million per annum. The integrated plant in the US will produce 1.3 million tonnes per annum of PTA and 1.1 million tonnes per annum of PET when complete. Avgol has six plants located in 3 continents with total capacity of 203,000 tonnes per annum.
IVL plans to fund these acquisitions with a combination of debt and equity. The funding sources consist of Bt20 billion in new debentures plus equity injections from the exercise of outstanding warrants. Some of the warrants exercised in January 2018 brought IVL about Bt7.15 billion in new equity capital. Outstanding warrants worth Bt8.77 billion could be exercised within August 2018. The company's debt to capitalization ratio is expected to range from 50% to 55% in the medium term.
RATING OUTLOOK
The “positive” outlook reflects the company’s improved business profile due to successful strategies expanding into high value-added (HVA) products. It also takes into account the benefits it receives from vertical integration and geographical diversification strategies implemented during 2015-2017.
RATING SENSITIVITIES
The ratings should be upgraded if IVL can improve its ratio of funds from operations (FFO) to total debt to about 20%-25% on a sustainable basis. The negative factor for the ratings could be a significant deterioration in financial performance. Sizable debt-funded acquisitions, which would lead to a weakening of the balance sheet, would also be a negative factor for the ratings.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2018, 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.