MARC AFFIRMS AAAID(S) ISLAMIC DEBT RATINGS OF PETRONAS CHEMICALS GLYCOLS (FORMERLY KNOWN AS OPTIMAL GLYCOLS) AND PETRONAS CHEMICALS DERIVATIVES (FORMERLY KNOWN AS OPTIMAL CHEMICALS)

Jun 13, 2012 -

MARC has affirmed its ratings of AAAID(S) on the respective Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) issuances of PETRONAS Chemicals Glycols Sdn Bhd (Glycols) (formerly known as Optimal Glycols (Malaysia) Sdn Bhd) and PETRONAS Chemicals Derivatives Sdn Bhd (Derivatives) (formerly known as Optimal Chemicals (Malaysia) Sdn Bhd) with a stable outlook. The rating actions affect RM155 million of outstanding BaIDS issued by Glycols and RM185 million of outstanding BaIDS issued by Derivatives.

The ratings have been affirmed on the basis of partial credit support provided for the rated obligations by the ultimate holding company of Glycols and Derivatives, Petroliam Nasional Berhad (PETRONAS) and the satisfactory standalone liquidity and credit metrics of the two entities.

The ultimate holding company, PETRONAS (rated AAA/Stable on public information basis), maintains a 64.35% ownership in PETRONAS Chemicals Group Berhad (PCGB), which in turn holds a 100% equity stake in Glycols and Derivatives respectively. PETRONAS has committed itself to provide debt service support for the rated issuances up to 30% of the outstanding amount of Glycols’ and Derivatives' BaIDS subject to a floor of USD52.0 million for both entities on a combined basis. The debt service support provides both entities considerable flexibility to withstand periods of market volatility and operating cash flow deficits. MARC's parental support assumption also considers the strategic fit of Glycols and Derivatives with PETRONAS Group's downstream businesses, the vertically integrated nature of the group's petrochemicals businesses, as well as the entities' access to cost-advantaged natural gas-based feedstock sourced from PETRONAS Group. Glycols produces intermediate products while Derivatives produces basic and specialty chemical products for a broad range of industries, including personal care products, pharmaceuticals, paints and packaging.

In the 12-month period to March 31, 2011 (FY2011), Glycols’ reported pre-tax profit grew 24% while its operating cash flow turned positive to RM251.5 million from negative RM61.3 million the year before. The improved credit metrics was achieved in the context of a marginal decline in revenue; sales volume decreased by 12% as a result of a major plant shutdown but this was largely offset by higher average selling prices. Net debt repayments during FY2011 helped lower its debt-to-equity (DE) ratio to 0.25 times. Glycols’ free cash flow generation has been historically uneven; Glycols posted positive free cash flow (FCF) of RM243.4 million in FY2011 compared to negative RM87.7 million the year before. This is, however, largely mitigated by the company’s manageable debt maturities and refinancing needs, satisfactory balance sheet liquidity and its good financial flexibility.

MARC views the credit profiles of Derivatives and Glycols as closely linked in light of the strategic, operational and financial relationships between the two entities. Derivatives continues to account for about 42% of Glycols’ revenue notwithstanding the latter’s direct sales of ethylene glycol to domestic customers (FY2010: 72%; FY2009: 66%). Derivatives, which still maintains the stronger standalone credit profile of the two entities, saw its revenue decline 6% year-on-year in FY2011 on account of an 8% decline in sales volume in line with the decrease in supply of ethylene oxide from Glycols. The decline in sales volume was also mitigated in part by higher average selling prices. Derivatives returned to profitability in FY2011 with a pre-tax profit of RM61.7 million compared to a pre-tax loss for the prior year. Its consistent positive FCF generation has enabled the company to reduce its DE ratio to 0.24 times, and to maintain sizeable cash and cash equivalent balances of RM167.3 million as at end-FY2011. Derivatives’ FCF is expected to remain positive while additional financial flexibility continues to be afforded by its comfortable cash position and borrowing availability.

Since MARC’s last ratings review, Derivatives and Glycols have continued to maintain compliance with gearing and debt service cover ratio (DSCR) financial covenants under the BaIDS which are computed on a combined basis. Incorporating cash balances, the combined DSCR of the entities came in at 3.20 times for FY2011, against the minimum DSCR requirement of 1.20 times. Derivatives and Glycols also ended FY2011 with a gearing ratio of 20:80 (0.25 times) against the covenanted gearing ratio of 70:30 (2.33 times). MARC expects the comfortable covenant headroom to persist. Apart from the debt service support provided by PETRONAS, external liquidity sources available to Derivatives and Glycols include RM500.0 million in undrawn credit lines on a combined basis as at end-March 2012.

The stable outlook reflects MARC’s assumption that the credit profiles of Glycols and Derivatives will remain supportive of the current ratings and that ultimate parental support from PETRONAS will remain very high.

Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.