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PTT Global Chemical Public Company Limited -- Moody's affirms PTTGC's Baa2 ratings; outlook stable

·17 min read

Rating Action: Moody's affirms PTTGC's Baa2 ratings; outlook stableGlobal Credit Research - 03 Mar 2021Singapore, March 03, 2021 -- Moody's Investors Service has affirmed PTT Global Chemical Public Company Limited's (PTTGC) Baa2 issuer and senior unsecured ratings.At the same time, Moody's has also affirmed (1) the Baa2 rating on the backed senior unsecured notes issued by GC Treasury Center Company Limited (GCTC), a wholly-owned subsidiary of PTTGC; and (2) the (P)Baa2 senior unsecured rating on the medium-term note (MTN) program established by GCTC and PTTGC. Any issuance under the program by GCTC will be unconditionally and irrevocably guaranteed by PTTGC.The rating outlook remains stable."The affirmation of PTTGC's Baa2 ratings reflects our expectation that higher earnings and cash flows in 2021-22 will drive an improvement in the company's credit metrics. While its leverage will remain elevated, this is mitigated to some degree by PTTGC's high financial flexibility afforded from its large cash holdings," says Hui Ting Sim, a Moody's Analyst.PTTGC's Baa2 ratings incorporate one notch of uplift based on Moody's expectation that its parent, PTT Public Company Limited (PTT, Baa1 stable), will provide financial support in times of stress."At the same time, the rating affirmation reflects our expectation that PTTGC will be financially prudent in its approach to investments, despite its stronger growth appetite," adds Sim, who is also Moody's lead analyst for PTTGC.RATINGS RATIONALEMoody's estimates that PTTGC's adjusted EBITDA will increase to THB38-43 billion per year over 2021-22 from around THB23 billion in 2020, but still well below THB61 billion in 2018. The expected increase in EBITDA relative to 2020 is based on Moody's oil price assumptions that implies the absence of inventory-related losses, and incremental earnings from the completion of PTTGC's planned projects. PTTGC's propylene oxide and polyols plant began commercial operations in December 2020, while its new naphtha cracker is scheduled to start commercial operations in the first quarter this year.PTTGC's reported debt obligations and cash holdings rose to multi-year highs of THB148 billion and THB61 billion respectively in 2020, from THB107 billion and THB26 billion in 2019. Moody's expects debt levels will remain elevated and the company's adjusted debt/EBITDA will remain above its downgrade threshold of 3.0x through 2022 at around 3.5x-4.0x. Nevertheless, PTTGC's elevated gross leverage can be accommodated within its ratings over the next 12-18 months because of its large cash holdings.Capital spending levels at PTTGC will decline following the completion of its planned projects. According to the company's latest investment plan, capital spending including planned maintenance will total $1.5 billion over 2021-23, which is almost half of around $3 billion spent during 2018-20.However, the company has ambitions to step out to grow and diversify its business portfolio. The final investment decision for its multibillion-dollar project in Ohio has been delayed, but remains tabled until the company secures an able partner. Meanwhile, the company continues to evaluate organic and inorganic opportunities to expand further downstream.Although PTTGC's growth appetite has risen in recent years, the ratings incorporate Moody's expectation that the company will remain financially prudent in its investment approach. Specifically, Moody's expects the company will refrain from entering into transactions that will materially harm its financial profile or lead to elevated execution risks, and control shareholder returns until the market environment is benign. Actions by PTTGC that deviate from Moody's expectation of a prudent financial policy will pressure its standalone credit quality and potentially ratings.PTTGC's Baa2 ratings are underpinned 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. At the same time, the ratings are constrained by PTTGC's exposure to the inherent volatility in the refining and petrochemical sectors, as well as its appetite to expand.PTTGC is strategically important within PTT's energy value chain, acting as the group's chemical flagship company. There is also close business integration between PTTGC and PTT. PTT provides ongoing support in the form of product offtake and an intercompany borrowing facility.PTTGC has excellent liquidity. The company held around THB61 billion of cash and short-term investments as at December 2020, against THB22 billion of debt maturing over the next 12 months.ESG CONSIDERATIONSIn terms of environmental, social and governance factors, the ratings consider the following:(1) PTTGC's material exposure to carbon transition risk, given its sizable refining operations. Global efforts to shift energy usage to low-carbon sources will gradually lower demand for petroleum products in coming decades. This risk for PTTGC is mitigated by the company's product offtake by PTT, and its integrated petrochemical business.(2) PTTGC is exposed to social risk in terms of responsible production and health and safety issues. The company's long operational track record and absence of major incidents mitigate this risk.(3) In terms of governance risks, PTTGC's ownership is concentrated in its largest shareholder, PTT, which holds a 45.41% stake as of December 2020. However, PTTGC's status as a listed company, its majority independent board and the track record of support from PTT mitigate this risk. PTTGC also provides detailed quarterly updates and regular investor communications on its operations and investment plans, reflecting a high degree of transparency.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable rating outlook reflects Moody's expectation that PTTGC will maintain its large cash holdings and a prudent financial policy while pursuing growth.Given the high leverage and weak industry environment, an upgrade over the medium term is unlikely. Moody's could upgrade the ratings, over the longer term, if the company (1) demonstrates a sustained improvement in its financial profile; (2) improves its business profile, such that earnings volatility from its core refining and commodity chemical operations could be mitigated; and (3) maintains its credit quality while pursuing growth.Specific credit metrics that Moody's will consider for an upgrade include adjusted RCF/debt above 30%, adjusted debt/EBITDA below 2.5x, and adjusted EBITDA/interest exceeding 9x, all on a sustained through-the-cycle basis.An upgrade of PTT's ratings will not automatically lead to an upgrade of PTTGC's ratings.Moody's could downgrade PTTGC's ratings if the company's standalone profile weakens by more than one notch. This could happen if (1) refining and petrochemical margins fail to recover; (2) PTTGC depletes its cash holdings materially; (3) PTTGC increases shareholder returns; (4) the company undertakes large-scale debt-funded projects in new geographies or product chains which weakens its credit metrics.Credit metrics indicative of a decline of its standalone profile by one notch include adjusted debt/EBITDA above 3x or adjusted EBITDA/interest less than 6x.Downward pressure on PTTGC's Baa2 ratings could also arise if there are developments resulting in a change in Moody's assessment of the relationship between PTTGC and its parent. Such developments could include significant reduction in PTT's ownership of PTTGC or a material change in the supply and offtake agreements between the two companies.A downgrade of PTT's ratings will not automatically lead to a downgrade of PTTGC's ratings.The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Listed on the Thai stock exchange in October 2011, PTT Global Chemical Public Company Limited (PTTGC) is the chemical flagship of Thailand's national oil company, PTT Public Company Limited. PTTGC is primarily engaged in the production and distribution of petroleum, aromatics and olefins products.PTTGC has a refining capacity -- including condensate -- of 280,000 barrels per day, and a combined petrochemical nameplate capacity of 11.65 million metric tons per year.As of December 2020, PTT was PTTGC's largest shareholder, with an ownership stake of 45.41%.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Hui Ting Sim Analyst Corporate Finance Group Moody's Investors Service Singapore Pte. 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