TRIS Rating upgrades the company rating on Indorama Ventures PLC (IVL) and the ratings on IVL’s senior unsecured debentures to “AA-” from “A+”. TRIS Rating also upgrades the rating on the company’s subordinated capital debentures to “A” from “A-”. The upgrade reflects the company’s strengthened business profile as a result of its strategic shift toward high value added (HVA) products and geographically diversified portfolio from the acquisitions during the last five years.
The ratings continue to reflect the company's leading position in the polyester value chain. IVL has a competitive edge stemming from vertical integration. IVL has production locations and customers around the world. The ratings also take into consideration the management team’s ability and experience, as well as IVL’s access to key technologies. However, the ratings are constrained by the volatile nature of the petrochemical industry.
KEY RATING CONSIDERATIONS
A global leader in polyester value chain
IVL has been the world’s largest polyethylene terephthalate (PET) producer. At the end of June 2018, IVL’s total capacity was 12.0 million tonnes per annum (MTA), comprising PET segment (40%), feedstock segment (45%), and fiber segment (15%). IVL’s strategy is to expand its portfolio along the polyester value chain, from feedstock (purified terephthalic acid (PTA) and monoethylene glycol (MEG)) to derivative products (PET and polyester fiber and yarn). IVL has diversified its production bases through greenfield investments and acquisitions of distressed assets during the last five years. Currently, IVL’s facilities are located in 29 countries across four continents: Asia, North and South America, Europe, and Africa. The recent investment in an ethane cracker and integrated paraxylene (PX) and PTA plants in the United States (US) have strengthened IVL's value chain.
As a vertically integrated producer, the company can achieve a number of advantages, including cost competitiveness, production efficiency, as well as geographically diversified production bases and wider market reach.
HVA products boost profitability
A structural shift of IVL’s portfolio toward HVA products improved the company’s overall margins. The proportion of HVA products to total production increased to 20% in 2017 from 16% in 2012. As HVA products typically have higher margin than necessity products, the company’s profitability improved, with earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne increasing to US$115 in 2017 from US$88 in 2012. Although HVA products represent only 20% of total production volume, they contributed 53% of IVL’s total EBITDA in 2017.
Geographic diversification efforts bring balance
Acquisitions over the past five years have balanced IVL's portfolio from the stand point of geographic diversification. Other than the well balance of PET and fiber segments, IVL now has PTA production plants across three regions. The spread between the price of PTA and its raw materials is generally wider in North America and Europe than in Asia. Before 2015, about 78% of PTA capacity was in Asia. Currently, about 37% of PTA capacity is located in Europe, 34% in America, and 29% in Asia.
Enlarged cash flow from acquisitions
A rise in production capacity and geographic diversification bases have led to an increase in cash flow. Production capacity of IVL was 7.5 MTA in 2014 but rose to about 10.6 MTA in 2017. In addition, the ongoing recovery in global polyester margin is also boosting IVL’s cash flows. The company’s funds from operations (FFO) increased to Bt28.5 billion in 2017 from Bt12.2 billion in 2014. For the first six months of 2018, the company’s FFO was Bt20.1 billion. The FFO to total debt ratio improved to 27.2% in 2017 from 15.2% in 2014.
TRIS Rating’s base case scenario incorporates the planned spending for maintaining, debottlenecking, expanding the current facilities and new acquisitions of IVL. Capital expenditures are projected at about Bt122 billion spanning 2018-2021 for the committed investment. In addition, TRIS Rating has also built in IVL’s additional investment of about Bt32 billion for any new opportunity for mergers and acquisitions (M&A).
Given the capital expenditures plan, the company’s total installed capacity will increase to about 15.6 MTA by 2021. Based on the higher mix of HVA products and a recovery of the industry margin, TRIS Rating expects the company’s EBITDA per tonne will be in the range of US$110-US$130 during 2018-2021, while the company’s FFO will hover around Bt35-Bt45 billion per year.
IVL has a significant amount of debt coming due. The company has a debt of Bt5.1 billion due in the second half of 2018. Approximately Bt17.8 billion in debt will come due in 2019, Bt13.5 billion in 2020, and about Bt16 billion in 2021. Considering the committed investments and operating cash flow during such periods, IVL would need to refinance some of its debt obligations. Given a positive prospect of business and accessibility to money market, refinancing risk is deemed manageable. TRIS Rating believes the company’s FFO total debt ratio could stay in a range of 23%-27% during the forecast period.
Improved capital structure
IVL's balance sheet has been strengthened during the last three years. Despite pursuing its growth strategy, the company is able to gradually improve its capital structure throughout that period. The exercise of warrants in 2017-2018 is expected to bring in about Bt28.5 billion in new equity capital. At the end of June 2018, the company's total adjusted debt (including hybrid debentures) was Bt121 billion, increasing from Bt109.5 billion at the end of 2016. However, the total debt to capitalization ratio improved from 56.5% at the end of 2016 to 47.2% at the end of June 2018.
In our base case scenario, TRIS Rating forecasts IVL’s total debt to capitalization ratio will stay below 50%, while the net debt to EBITDA ratio will stay around 3-4 times during 2018-2021.
RATING OUTLOOK
The “stable” outlook reflects TRIS Rating’s expectation that IVL should be able to demonstrate strong cash flow generation from a well-balanced polyester portfolio. More contribution from HVA products and integration of supply chain across continents should partly mitigate commodity price risk inherent in the volatile petrochemical industry.
RATING SENSITIVITIES
IVL’s credit upside is limited over next 12-18 months. The negative factor for the ratings would be a significant deterioration in operating performance. Any sizable debt-funded acquisitions which significantly weaken the balance sheet over a long period will also be a trigger for the downgrade of the ratings.
COMPANY OVERVIEW
IVL was established by the Lohia family on 21 February 2003. As a holding company, the company invests mainly in businesses along the polyester value chain. IVL was listed on the Stock Exchange of Thailand (SET) on 5 February 2010. As of 30 June 2018, the Lohia family held a 66.4% stake in IVL. The company's core businesses comprise the production of PET, fiber, and the feedstock. At the end of June 2018, IVL's total installed capacity was 12.0 MTA, of which the PET segment comprised 40%, the feedstock segment 45%, and the fiber segment 14%.
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.