Fitch Ratings (Thailand) has downgraded PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating and senior unsecured rating to 'AA(tha)' from 'AA+(tha)'.

The Outlook is Stable. Fitch has also affirmed the National Short-Term Rating at 'F1+(tha)'.

The downgrade reflects Fitch's expectation that PTTGC's financial leverage will be higher than commensurate with a 'AA+(tha)' rating over the next three years, as a result of lower operating cash flows and higher capex in 2022 than we expected. Spreads for petrochemical products are likely to weaken in 2022, due to slower demand growth and new petrochemical capacity. As a result, Fitch expects PTTGC's financial leverage, measured by net debt/EBITDA, to remain above 2.5x until 2024, even after factoring in modest earnings recovery and lower capex from 2023.

Key Rating Drivers

Elevated Leverage: PTTGC's net debt/EBITDA increased to 3.1x at end-2021 following the acquisition of Allnex Holding GmbH in 4Q21. However, the pace of deleveraging is likely to be slower than Fitch previously expected due to weaker-than-expected earnings and a larger capex plan. We expect PTTGC's net debt/EBITDA to further increase to around 3.7x in 2022. Leverage is likely to decline in 2023 and 2024, but remain above 2.5x, through a gradual earnings recovery and lower capex.

Weaker Earnings in 2022: Fitch expects PTTGC's EBITDA (excluding Allnex) to drop to around THB40 billion-45 billion in 2022 from THB60.5 billion in 2021. Petrochemical spreads are likely to weaken in 2022 from higher feedstock costs, while slow demand and new supply could reduce the company's ability to pass on cost increases.

We expect strong market gross refining margins (GRM) in 2022, although PTTGC's refinery earnings will be offset by higher crude premium and hedging losses as actual crude and product prices exceed hedging prices. PTTGC incurred a hedging loss of THB8.6 billion during 1Q22 resulting in an EBITDA loss in its refining segment despite strong GRM of USD7.6 per barrel. Furthermore, the government's proposal to protect consumers from rising fuel costs, such as windfall tax or other forms of support from refinery operators, if implemented, could have a significant impact on PTTGC's refinery earnings.

Higher Capex: PTTGC has revised up its capex for 2022 to around THB32 billion (2021: THB17.4 billion), mainly to accommodate additional capex at Allnex. PTTGC's capex is likely to fall to around THB20 billion-25 billion a year in 2023 and 2024. PTTGC continues to evaluate investment in a new US cracker project to support growth and diversification, but the final investment decision is likely to be delayed until the company finds a new partner.

More Value-Added Products; Diversification: The Allnex acquisition is aligned with PTTGC's strategy to diversify into high-value products and the specialty chemical business, which have been more insulated than commodity products during the downturn due to more resilient end-market demand. EBITDA contribution from PTTGC's performance chemicals increased to around 30% in 1Q22 after the acquisition, from less than 5%, supporting improvement in the business profile.

Allnex will also provide access to the US and European markets, where PTTGC has limited exposure, and reinforce its well-established position in Asia. We believe the acquisition will add stability to PTTGC's earnings and enhance its overall EBITDA margin by 1%-2%. Allnex is a leading specialty chemical resin producer for the coating industry with a diverse product portfolio and exposure to several industrial end-markets.

Linkages with PTT: PTTGC's 'AA(tha)' National Long-Term Rating incorporates a two-notch uplift from the Standalone Credit Profile (SCP) of 'a+(tha)', reflecting our view that parent PTT Public Company Limited (PTT, BBB+/AAA(tha)/Stable) has 'Medium' strategic and operational incentives to support PTTGC under Fitch's Parent and Subsidiary Linkage Rating Criteria. Fitch believes the petrochemical and refinery business, of which PTTGC is a major component, is strategically important to PTT. PTTGC is also PTT's major feedstock off-taker as it is the group's flagship petrochemical producer.

Fully Integrated, Low-Cost Producer: PTTGC's large operating scale, wide product range and high utilisation rate result in higher operating cash flow and a wider operating margin than those of domestic petrochemical and refining peers. PTTGC also benefits from cost-competitive feedstock, as the majority of its olefin feedstock is gas-based and available domestically. It also has a favourable gas-supply agreement with PTT, which reduces margin volatility when market conditions fluctuate.

Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the petrochemical and refinery sectors. The volatility of product-to-feed margins, refining margins, feedstock prices, oil prices and working-capital requirements could significantly affect PTTGC's earnings and cash-flow generation. PTTGC is also exposed to supply concentration risk, as the majority of its feedstock is secured from its parent. This is mitigated by PTT's strong credit profile and position as Thailand's leading oil and gas company

Derivation Summary

PTTGC is PTT's largest petrochemical subsidiary and flagship in the petrochemical business, which was evident from the injection of PTT's petrochemical assets into PTTGC in 2017. PTTGC's SCP reflects its operating scale and high integration with petrochemicals, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers, while its financial leverage is also lower.

PTTGC has a larger operating scale and more integration in petrochemicals than Thai Oil Public Company Limited (TOP, A+(tha)/Negative). It also has higher profitability than TOP. PTTGC's operations and diversification are much larger than that of IRPC Public Company Limited (A-(tha)/Stable). In addition, PTTGC has a stronger balance sheet and wider operating profit margin than IRPC.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Benchmark Brent crude price at USD105/barrel in 2022, USD85/barrel in 2023, USD65/barrel in 2024 and USD53/barrel in 2025 and thereafter, with PTTGC's crude procurement costs adjusted for applicable premiums;

Profitability of olefins to drop in 2022 as new supply will pressure the petrochemical spreads;

Gross refining margin to improve during 2022-2023; demand from transportation sector improves gradually;

Extension of credit terms on crude supply from PTT to end in 2024, resulting in crude payment terms reducing to 30 days from 90 days;

Total capex and investment of around THB64 billion over 2022-2023;

Dividend payout of 50% of consolidated net profit.

Proportionate consolidation of HMC Polymers Company Limited (A-(tha)/Stable)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Net debt/EBITDA decreasing to below 2.5x on a sustained basis

Evidence of stronger ties with PTT

Factors that could, individually or collectively, lead to negative rating action/downgrade:

An increase in net debt/EBITDA to above 3.5x for a sustained period

Weakening of ties with PTT

Liquidity and Debt Structure

Strong Liquidity: PTTGC had outstanding debt of THB283 billion at end-March 2022, of which THB44.9 billion matures within 12 months. Liquidity is supported by unrestricted cash of THB86.2 billion at end-March 2022. PTTGC also has undrawn uncommitted credit lines amounting to THB20.9 billion to help manage its capex and liquidity requirements. We believe banks will honour these lines, despite being uncommitted, in light of the company's leading market position in the petrochemical business in Thailand.

Issuer Profile

PTTGC is the largest, fully integrated petrochemical and refinery company in Thailand and a flagship company under the PTT group. The combined petrochemical and chemical capacity was 14 million tonnes a year at end-2021 and crude oil and condensate distillation capacity was 280,000 barrels per day.

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.

Public Ratings with Credit Linkage to other ratings

PTTGC's rating incorporates a two-notch uplift from its SCP, reflecting our view that its parent PTT has medium operational and strategic incentives to support it.

(C) 2022 Electronic News Publishing, source ENP Newswire