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Related Issuers
Rating Action:

Moody's affirms IRPC's Ba1 rating; changes outlook to stable from positive

22 Jan 2020

Singapore, January 22, 2020 -- Moody's Investors Service has changed the outlook on IRPC Public Company Limited's ("IRPC") rating to stable from positive.

At the same time, Moody's has affirmed IRPC's Ba1 corporate family rating (CFR).

RATINGS RATIONALE

"The change in outlook to stable from positive reflects our expectation that IRPC's credit metrics will recover over the next 12 months, following a significant weakening over the last 12 months due to the sustained decline in regional refining and petrochemical margins," says Vikas Halan, a Moody's Senior Vice President.

Singapore refining margins averaged $3.70/bbl for 2019—significantly below the $6.00/bbl average for 2017-18—and turned negative in December 2019. The lower margins are the result of a steep fall in fuel oil prices, in turn driven by the International Maritime Organization's new IMO 2020 regulation that restricts the use of high-sulfur fuel oil in marine transportation. Petrochemical spreads have also come down significantly, with ethylene-naphtha spreads ending 2019 at record lows.

Consequently, IRPC reported a 70% year-on-year decline in its EBITDA for the nine months ended 30 September 2019.

"While refining margins and petrochemical spreads in Asia should somewhat recover in 2020, they will likely remain depressed compared to 2017 and 2018 levels, constraining any earnings recovery for IRPC," says Halan.

Specifically, Moody's expects IRPC's debt/EBITDA will rise to 6.3x-6.8x in 2019 from 3.4x in 2018, before recovering to about 4.0x in 2020.

These estimates also incorporate Moody's expectation that (1) IRPC's working capital needs will decline as PTT Public Company Limited (PTT, Baa1 positive) has extended the credit term for the purchase of crude; and (2) IRPC will act on its revised capital spending plan, especially in terms of deferring capital spending on its MARS project -- a new naphtha-reforming and aromatics complex -- to at least 2021.

IRPC's Ba1 CFR incorporates a one-notch uplift to reflects Moody's expectation that its parent, PTT, will provide extraordinary support when needed, given the close integration between the two companies.

IRPC's underlying credit strength is underpinned by its moderate refining scale and downstream petrochemical integration, the long-term feedstock supply and product offtake agreements with PTT.

At the same time, the rating is constrained by IRPC's concentration risk given its single-site operations, and by its exposure to inherent cyclicality in the refining and petrochemical sector.

In terms of environmental, social and governance (ESG) factors, the rating also considers the following:

(1) As a refining & marketing company, IRPC has material exposure to carbon transition risk. The global efforts to transition to low-carbon energy will gradually lower demand for petroleum products in the coming decades. This risk for IRPC is somewhat mitigated by the company's product offtake by PTT and its growing petrochemical business.

(2) IRPC is exposed to social risk in terms of responsible production and health & safety. This social risk is mitigated by the company's long operational track record without major incidents.

(3) In terms of governance risk, IRPC's ownership is concentrated in its largest shareholder, PTT, which held a 48% stake as of 31 December 2019. However, this risk is largely mitigated by IRPC status as a listed company and the track record of support from PTT. IRPC's rating incorporates a one-notch uplift from expected extraordinary support from PTT, which also provides ongoing support in the form of product offtake, extended crude payment terms and intercompany borrowing facility. IRPC also has a 15 member strong board, out of which eight are independent directors.

IRPC's liquidity is weak. As of 30 September 2019, IRPC had cash and cash equivalents of THB3 billion compared with THB16.6 billion of debt maturing within the next 12 months. With cash flow from operations of THB20 billion over the next 12 months, Moody's expects IRPC will have to rely on external financing to fulfill its debt obligations through 2020.

As of 30 September 2019, IRPC had access to undrawn committed facilities of THB2.1 billion, as well as undrawn uncommitted facilities of THB16.8 billion. In addition, PTT has extended an intercompany credit facility of THB10 billion to IRPC, out of which THB9 billion remains undrawn.

IRPC continues to have a high level of access to the local capital market for its funding needs, supported by its strong banking relationships in Thailand and association with PTT. The company also has a track record of raising Thai Baht-denominated financing through bank loans and bonds.

The stable rating outlook reflects Moody's expectation that refining margin and petrochemical spreads will improve from 2019 levels, such that IRPC's credit metrics will improve to a level more appropriate for its rating.

The rating could be downgraded if refining and petrochemical margins fail to recover in 2020 or if IRPC still goes ahead with its planned capital spending for it MARS project. Specific metrics Moody's would consider for a downgrade include debt/EBITDA above 5.0x and EBIT/interest expense below 3.0x, both on a sustained basis. The rating could also be downgraded if there is a change in relationship between IRPC and PTT such that its results in a lower expectation of support.

An upgrade is unlikely over the medium term given the company's weak credit metrics and soft refining margins. However, IRPC's rating could be upgraded in the longer term if improved refining and petrochemical margins translate into healthy operating cash flows and stronger credit metrics. Specific metrics Moody's would consider for an upgrade include retained cash flow/adjusted debt above 25%, adjusted debt/EBITDA below 3.0x, and EBIT/interest above 4.5x-5.0x, all on a sustained basis.

The principal methodology used in this rating was Refining and Marketing Industry published in November 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed on the Thailand stock exchange, IRPC Public Company Limited is an integrated refinery and petrochemical operator in Thailand. It owns the third largest refinery in the country with a nameplate capacity of 215,000 barrels per day. The company is a producer of naphtha and reformate-based petrochemicals, and is also a leading producer of styrenics in Thailand.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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