Fitch Ratings (
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
Weaker Earnings in 2022: Fitch expects PTTGC's EBITDA (excluding Allnex) to drop to around
We expect strong market gross refining margins (GRM) in 2022, although
Higher Capex: PTTGC has revised up its capex for 2022 to around
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
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
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
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
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Benchmark Brent crude price at
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
Dividend payout of 50% of consolidated net profit.
Proportionate consolidation of
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
Issuer Profile
PTTGC is the largest, fully integrated petrochemical and refinery company in
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.
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