This is a correction of a release published 2 April 2020. It corrects the leverage metric used in the "Delay in Project" Key Rating Driver and Rating Sensitivities.
Fitch Ratings (Thailand) has downgraded IRPC Public Company Limited's National Long-Term Rating and senior unsecured rating to 'A-(tha)' from 'A(tha)'. The Outlook is Stable. Fitch has also downgraded IRPC's National Short-Term Rating to 'F2(tha)' from 'F1(tha)'.
The downgrade reflects Fitch's expectations that IRPC's credit metrics will remain elevated due to weak margins, affecting operating cash flows. We expect IRPC's financial leverage - measured by FFO net leverage - to remain above 4.5x over the next three years with earnings in 2020 hurt by weak demand and margins due to the disruptions caused by the coronavirus. However, we think refining and petrochemical spreads will recover gradually in 2021-2022.
The Stable Outlook considers Fitch's expectation IRPC has adequate headroom in its financial profile at the current rating level.
KEY RATING DRIVERS
Weakened Credit Metrics: Fitch expects IRPC's credit metrics to remain weak in 2020-2022. IRPC's FFO net leverage increased substantially to 8.7x in 2019 (2018: 3.0) due mainly to weak refining margins and petrochemical product spreads. Its EBITDA and FFO declined by 68% and 73%, respectively. Fitch expects IRPC's financial leverage to weaken further in 2020, and gradually recover to below 5x by 2022. Waning demand due to the coronavirus outbreak will pressure refining margins in the near term, although we expect them to improve over the medium term. In addition, petrochemical spreads are likely to be pressured by large new capacity additions.
Delay in Project: IRPC has postponed a final investment decision on its paraxylene (PX) project to 2021 from this year. The company said it will reconsider its investment and ownership of the project. As a result, Fitch has not factored in this investment in our forecasts. The project cost was initially estimated at USD1.1 billion. However, if IRPC decides to undertake this project with debt financing, its FFO net leverage would increase materially from our current forecasts.
Fitch expects IRPC's capex to stabilise in 2020-2022 at about THB6 billion a year without the PX project. The current capex is mainly for upgrading its plants to meet EURO5 emission standards, a floating solar project, small expansion projects and maintenance.
Credit Terms to Increase Further: IRPC plans to increase credit terms on its crude purchases from its parent, PTT Public Company Limited (AAA(tha)/Stable), in 2020 to manage financial leverage during periods of weak operating cash flows. The company will increase the credit term to 90 from 60 days, resulting in lower working-capital needs and debt requirements. IRPC previously expanded the term to 90 days in 2015 when the company had high financial leverage and heavy investments. Fitch expects the extension to 90 days to continue at least to end-2022. The credit terms are generally reviewed annually and can be extended by mutual agreement, according to the company.
Improving Business Profile: Fitch expects IRPC's margin to improve over the medium term, supported by increased output of higher-value-added products. The start of its polypropylene expansion project and polypropylene inline compound project should boost its margin, as these products have wider spreads than commodity-grade polypropylene. IRPC announced a joint-venture agreement with a Japanese petrochemical company to produce polypropylene compounds for the automotive sector, which should help expand its end-user base. Fitch expects committed project upgrades to enhance profitability upon completion, scheduled for 2022.
Fully Integrated Refinery: IRPC has a competitive advantage as a fully integrated refining and petrochemical company with expertise and a long record in Thailand. Its recent and planned investments will pave the way for further integration into petrochemical products. Vertically integrated producers enjoy cost advantages, a broader product range and lower earnings volatility relative to non-integrated operators.
Highly Cyclical Business: IRPC's credit profile is restrained by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. The volatility of oil prices, refining margins and petrochemical spreads, as well as high working-capital requirements, could affect significantly earnings and cash-flow generation.
Linkages with PTT: IRPC's National Long-Term Rating incorporates a two-notch uplift from its Standalone Credit Profile (SCP) of 'bbb(tha)' to take into account its moderate linkages with PTT. Fitch believes the petrochemical and refinery business, in which IRPC is a vital component, has increased in strategic importance to parent PTT after the business was reorganised over the past few years. The petrochemical and refinery business accounted for around 28% of group EBITDA in the past three years.
IRPC is PTT's key petrochemical producer, focusing on downstream and naphtha-based production. PTT regards IRPC as its downstream specialty petrochemical vehicle. Its importance was demonstrated by PTT's extension of credit terms for crude supply to IRPC to alleviate cash flow pressure during the subsidiary's period of high investment.
IRPC's SCP reflects the integration of its refining and petrochemical operations. Its business profile is moderate relative to that of Thai downstream oil and gas peers, while its leverage is high. IRPC has a larger operating scale than Esso (Thailand) Public Company Limited (bills of exchange rated F1(tha)), in terms of refining capacity, revenue and EBITDA. IRPC has larger petrochemical operations but ESSO has an oil-retailing business. IRPC has better margins but slightly higher leverage.
IRPC's refinery is less complex and smaller than that of Thai Oil Public Company Limited (TOP, AA(tha)/Stable, SCP: a+(tha)), but IRPC has larger petrochemical operations. TOP has a stronger balance sheet over the long term and a better operating profit margin due to a higher utilisation rate at its plant.
IRPC has a much smaller operating scale and petrochemical operations than PTT Global Chemical Public Company Limited (PTTGC; AA+(tha)/Negative, SCP: aa-(tha)). It is also weaker than PTTGC in terms of leverage and operating profit margin.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Benchmark Brent crude price at USD35/barrel in 2020, USD45/barrel in 2021 and USD53/barrel in 2022 with IRPC's crude procurement costs adjusted for applicable premiums
- Gross integrated margins to weaken in 2020 partly due to stock loss from a sharp oil price drop in 1Q20, and to improve gradually in 2021-2022
- Capex and investment of THB6.2 billion a year over 2020-2022
- Credit terms on crude purchases to increase to 90 days from 60 days
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- FFO net leverage sustained below 4.5x
- Evidence of stronger ties with PTT
Factors That Could, Individually or Collectively, Lead to Negative Rating
- Weaker operating cash flow than Fitch's expectations, increasing debt-funded investments or high cash distributions to shareholders, resulting in FFO net leverage rising above 5.5x for a sustained period
- A weakening of linkage with PTT
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: IRPC had outstanding debt of THB59.1 billion at end-2019, of which THB15.1 billion matures within 12 months - this consists of THB8.2 billion of the current portion of long-term debt and THB6.9 billion of short-term borrowings from financial institutions. Liquidity is supported by unrestricted cash of THB3.0 billion, available committed working-capital facilities of THB5.1 billion, an available credit facility from PTT of THB10 billion and the extension of the flexible credit terms from PTT.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com