At the same time, Moody's has withdrawn the Baa2 rating of PTT Aromatics & Refining Public Company Limited and the Baa3 rating of PTT Chemical Public Company Limited following the completion of their amalgamation on19 October 2011.
This rating action concludes the review for possible upgrade for PTT Chemical's Baa3 rating initiated on 25 February 2011.
RATINGS RATIONALE
The Baa2 rating captures the entity's standalone rating of Baa3, plus one-notch of uplift based on Moody's assessment of the credit support that its parent, PTT Public Company Ltd (Baa1/stable), is likely to provide in the event of distress. PTT Public is a largest single shareholder of PTT Global Chemical with a 48.92% interest following the completion of the amalgamation.
The standalone rating of Baa3 reflects PTT Global Chemical's now larger scale of operation, enhanced product flexibility, competitive cost structure, and access to feedstock and product sales via long-term agreements with PTT Public.
"The new entity's financial profile benefits from relatively low leverage, moderate capex plans and positive free cash flow generation,"says Simon Wong, a Moody's Vice President and Senior Analyst. "We expect PTT Global Chemical's debt to EBITDA to average no more than 2.5x through the cycle, while average retained cash flow to debt would be over 20%."
"The rating also recognizes the volatile nature of the refining and petrochemical industry," adds Wong, also the primary analyst for PTT Global Chemical.
"However, the related but distinct upstream refining and downstream petrochemical industry cycles would reduce the volatility in both the earnings and cash flow that PTT Aromatics & Refining and PTT Chemical were subject to on a standalone basis," adds Wong.
Nevertheless, as PTT Aromatics & Refining's upstream refined petroleum products cannot directly feed into PTT Chemical, which operates primarily gas-based production, Moody's does not expect significant immediate synergies arising from the amalgamation. Nevertheless, the swapping of by-products is expected to result in some cost-savings and value added for the new entity.
The rating outlook is stable, reflecting Moody's expectation that PTT Global Chemical will maintain its leading position in Thailand's petrochemical sector and its solid financial profile.
Upward rating pressure may emerge if PTT Global Chemical successful expands its downstream petrochemical product range and enhances its profitability. Indicators would include RCF/debt rising above 25-35%, and positive free cash flow, EBIT/Interest greater than 7x, all on a sustained through the cycle basis.
Downward rating pressure may emerge if the profitability of PTT Global Chemical deteriorated due to weak refining and petrochemical margins with RCF/Debt dropping below 20%, or EBIT/Interest less than 5x, for a prolonged period. Continued negative free cash flow generation would also likely to pressure the rating.
Furthermore, a significant reduction in PTT Public's stake in PTT Global Chemical and/or a material change to the supply and off-take agreement between the two would be negative for the rating.
PTT Global Chemical is the largest diversified petrochemical company in Thailand, with 8.3 million tons of petrochemical production capacity. It also has one of the most complex refining facilities in Asia with 280,000 bpd of upstream crude distillation capacity.
The principal methodology used in rating PTT Global Chemical was Moody's Global Chemical Industry Rating Methodology, published in December 2009.
Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The amalgamation of PTT Aromatics & Refining Public Company Limited and PTT Chemical Public Company Limited was announced in February 2011 and was conducted via a share swap. PTT Global Chemical has assumed all the existing debt of both, including rated USD bonds comprising US$300 million 5.5% notes due 2012 and US$300 million 5.5% notes due 2015. The companies have obtained the necessary written consent from their lenders in respect of the amalgamation.