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Rating Action:

Moody's changes ratings outlook for four Formosa companies to positive from stable

25 Jan 2018

Hong Kong, January 25, 2018 -- Moody's Investors Service has revised to positive from stable the ratings outlook of the four companies that together comprise the Formosa group, namely Formosa Plastics Corporation, Nan Ya Plastics Corporation, Formosa Chemicals & Fiber Corporation, and Formosa Petrochemical Corporation.

At the same time, Moody's has affirmed the Baa1 issuer ratings for the four entities.

RATINGS RATIONALE

In assigning the Baa1 ratings, Moody's has taken the approach of assessing the four companies on a group basis, even though they do not legally constitute a group or fall under any formal group structure.

Accordingly, the ratings reflect the combined strength of the four companies, each of which is assigned the same rating.

"The change in ratings outlook to positive from stable reflects our expectation that the improved credit profile of the four Formosa-related companies, on a combined basis, will likely be sustained over the next 12-18 months, driven by continued robust earnings and operating cash flows," says Franco Leung, a Moody's Vice President and Senior Credit Officer.

Moody's expects the companies' adjusted debt/EBITDA will remain robust at 2.0x-2.2x over the next 12-18 months compared to about 2.7x in 2016, based on the expectation that the group will prudently manage its overall debt levels. Moody's believes the group's strong cash flows, which form important resources for funding business expansion, will help it achieve low debt leverage.

Total reported debt fell by around NTD72 billion at the end of September 2017 from the level at year-end 2016, as the companies reduced its debt by using their strong operating cash flow. Total adjusted debt fell by a larger NTD88 billion over the same period, largely because of a modest reduction in guarantees to their Vietnam steel business.

The group's careful management of debt levels will mitigate the risk of EBITDA volatility against a backdrop of volatile business conditions. Moody's expects the companies' adjusted EBTIDA in 2018 and 2019 will decline mildly from around USD8.5 billion in the 12 months ended September 2017, given a likely softer performance in the refining and petrochemical businesses. Nevertheless, such a level of earnings is still robust and compares favorably with the average USD5.6 billion reported in 2014-2016.

Formosa's steel plant in Vietnam has commenced its main operations and achieved a basic level of production following the commissioning of its first blast furnace in 2017. Moody's expects the steel plant will achieve a notable increase in production in 2018-2019 as it proceeds with the planned operation of the second blast furnace. Given that the steel plant will start to generate meaningful operating cash flows to support its own operations, Moody's expects that further financial support from the four Formosa companies will be limited in 2018-2019.

The Baa1 ratings reflect the four companies' long track records, large operational scales, integrated business models and strong positions in the domestic petrochemical market. The ratings also reflect the group's strong access to funding channels in Taiwan (Aa3 stable) and improved debt leverage.

On the other hand, most of the group's products are commodity petrochemicals, which are exposed to strong industry competition and high cyclicality. This cyclicality is partly mitigated by the group's diversified product mix and end-markets, and its stringent cost controls.

The ratings could be upgraded if (1) the group continues to deliver robust earnings and cash flows even amid a volatile oil price environment; (2) it remains cautious in its investment spending and capital commitments for business expansion; and (3) it continues to improve its financial profile such that adjusted debt/EBITDA drops below 2.25x-2.50x on a sustained basis

A downgrade is unlikely in the near term, given the positive outlook on the companies' Baa1 issuer ratings.

The outlook could return to stable if (1) the group's EBITDA significantly declines; (2) debt leverage deteriorates such that adjusted debt/EBITDA trends above 2.5x-2.75x due to debt-funded business expansion or a deterioration in its operations; (3) its operating cash flows weaken materially.

Moody's rating approach for the four companies on a group basis is based on the following considerations:

(1) The four companies share common business strategies and have jointly invested in and guaranteed the debt of associated companies, such as Formosa Ha Tinh Steel Corporation;

(2) Their operations are highly integrated, with each housing processes that form part of an overall value chain;

(3) There is an intertwined cross-shareholding structure among the four; and

(4) There is a long track record of common management control and significant beneficial ownership by their major shareholders.

Consequently, the rating drivers and the combined quantitative financial measurements are applied on a group basis.

The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Formosa Plastics Corporation was incorporated in 1954. It manufactures and sells plastic raw materials, chemical fibers, and petrochemical products.

Nan Ya Plastics Corporation was incorporated in 1958. It manufactures and sells plastic products, polyester fibers, petrochemical products, and electronic materials.

Formosa Chemicals & Fiber Corporation was incorporated in 1965. It produces and sells petrochemical products, including PTA, PS, AN, butadiene, SM polymer, SM, benzene, toluene, p-xylene (PX) and o-xylene (OX), as well as nylon fiber, and rayon staple fiber.

Formosa Petrochemical Corporation was incorporated in 1992. It engages in petroleum refining and the integrated manufacture of hydrocarbon products.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Franco Leung
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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