Moody’s bestows PTTGC with Baa2 for cash flow

Moody’s Investors Service rated PTT Global Chemical Plc (PTTGC) and its senior unsecured ratings at a steady Baa2.

“The ratings affirmation reflects our expectations that PTTGC will maintain its strong credit metrics over the next 12-24 months, supported by its robust operating cash flow generation of 50-55 billion baht per year,” said Rachel Chua, an assistant vice-president and analyst.

In the next two years, Moody’s expects PTTGC’s adjusted retained cash flow (RCF)/debt to be around 30% and its adjusted earnings before interest, taxes, depreciation and amortisation (ebitda) interest coverage to stay above 14 times.

“In addition, PTTGC’s Baa2 ratings incorporate the company’s increasing growth appetite and the associated execution risks, as it continues to undertake large-scale capital investment projects,” said Ms Chua.

PTTGC’s $3 billion (96 billion baht) capital expenditure plan for 2018-22 will be largely front-loaded, with around $1 billion each to be spent in 2018 and 2019. Key projects include the construction of a 750 thousand tonnes per year naphtha cracker and two polyurethane plants.

Moody’s expects PTTGC’s robust operating cash flows and sizeable cash balance of 56 billion baht as of March 31 to provide a sufficient liquidity buffer and financial flexibility for the company to carry out its capital expenditure plans.

PTTGC is studying a number of other projects, including the construction of an ethane cracker in the US. While such a large-scale project into a new market would significantly heighten operating risks, Moody’s said it will assess the funding plan and project structure, including working partners, feedstock and product offtake arrangements when the company decides to proceed.

The ratings agency said PTTGC’s Baa2 ratings are also supported by its position as the largest diversified petrochemical company in Thailand, competitive cost structure and long-term feedstock supply and product offtake agreements with its largest shareholder, PTT Plc, rated at Baa1 stable.

The rating is constrained by PTTGC’s exposure to operating and execution risks and the inherent volatility in the refining and petrochemical sectors.

The Baa2 rating also incorporates a one notch uplift, reflecting the likelihood of its parent PTT providing credit support in the event of distress. PTTGC is strategically important within PTT’s energy value chain, as the chemical flagship within the group, and there is close business integration between the companies.

The rating outlook is stable, reflecting Moody’s expectation that PTTGC will maintain its leading position in Thailand’s petrochemical sector and its solid financial profile, while pursuing growth.

Moody’s said upward ratings pressure could emerge under several scenarios: if PTTGC’s planned expansion projects are executed on time and on budget; if its business profile improves through the expansion into value-added downstream petrochemical products range; if it maintains its credit profile while pursuing its aggressive growth appetite such that its adjusted RCF/ debt stays above 30%, and adjusted ebitda/ interest exceeds nine times, all on a sustained through-the-cycle basis.

An upgrade of PTT’s ratings will not automatically lead to an upgrade in PTTGC’s ratings.

Moody also warned of downward rating pressure if PTTGC’s credit profile deteriorates as a result of several scenarios: a reduction in profitability and cash flows due to weak industry conditions; major hurdles or delays in implementing its current expansion plans; a heightened risk profile from undertaking large-scale projects in new geographies/product chains; or higher leverage from aggressive funding of its expansion/acquisition plans with debt.

Indicators would include adjusted RCF/ debt falling below 20% or ebitda/interest less than six times. Continued negative free cash flow generation would also likely pressure the rating.

Furthermore, a significant reduction in PTT’s ownership of PTTGC and/or a material change in the supply and offtake agreements between the two companies would be negative for the rating. PTTGC’s final ratings will also be downgraded if parent PTT’s rating is downgraded.

PTTGC has a refining capacity (including condensate) of 280,000 barrels per day and a combined petrochemical nameplate capacity of 10.2 million metric tonnes per year.

As of Dec 31 2017, PTT was its largest shareholder with an ownership stake of 48.89%.