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Rating Action:

Moody's revises outlook on Hanwha Total Petrochemical to negative

 The document has been translated in other languages

11 Mar 2020

Hong Kong, March 11, 2020 -- Moody's Investors Service has changed the outlook on Hanwha Total Petrochemical Co., Ltd. (HTP) to negative from stable.

At the same time, Moody's has affirmed the company's Baa1 issuer and senior unsecured ratings.

RATINGS RATIONALE

"The change in outlook to negative reflects our expectation that HTP's financial leverage over the next 1-2 years will remain significantly higher than the average for 2016-18, after weakening significantly in 2019," says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer.

"This expectation is based on the prolonged weakness in petrochemical spreads and the company's elevated debt level," adds Yoo.

Moody's estimates that HTP's adjusted debt/EBITDA deteriorated to around 3.0x in 2019 from 1.5x in 2018, mainly because of a significant decline in earnings and higher debt to fund large capital spending. Although Moody's expects higher earnings to improve HTP's adjusted debt/EBITDA to 2.2x-2.7x in 2020-21, this level of financial leverage is weak for the company's Baa1 ratings.

Moody's expects HTP's adjusted EBITDA to increase by 10%-12% per annum over 2020-21 after decreasing by around 40% in 2019. Moody's projections for 2020-21 assume no material inventory-related gains or losses during this period. The EBITDA increase will likely be driven by incremental earnings from its new facilities as well as the absence of sizable one-off losses such as those it incurred in 2Q 2019 following production disruptions caused by a strike at its labor union and an accident at its domestic plant.

This forecast for a modest recovery in EBITDA is despite Moody's expectation of a further squeeze in petrochemical spreads in 2020, which will be partly driven by the outbreak of the coronavirus.

But despite the improvement, this level of earnings is meaningfully lower than the average levels HTP recorded during 2016-18, reflecting the unfavorable petrochemical operating environment caused by soft demand and oversupply.

In addition, Moody's expects HTP's reported debt to remain largely flat in 2020 and only start decreasing moderately in 2021, as capital spending should remain sizable until 2020 because of its ongoing expansion of olefin facilities.

HTP's reported debt increased to around KRW2.6 trillion at the end of September 2019 from KRW2.2 trillion at the end of 2018 and KRW1.7 trillion at the end of 2017 because of sizable capital spending and large dividend payments.

HTP's Baa1 ratings are underpinned by its competitive position as a leading petrochemical manufacturer in Korea, and its diversified product portfolio. These strengths are partly offset by the company's high exposure to the inherently cyclical petrochemical markets and elevated financial leverage for its rating level.

HTP's ratings also incorporate the financial support that the company is likely to receive from Total S.A. (Aa3 stable) -- which owns a 50% stake in HTP through its subsidiary Total Holdings U.K. Limited -- in case of need, given HTP's significant contribution to Total's Asian chemical businesses.

The ratings also take into account the following environmental, social and governance (ESG) factors.

HTP is exposed to increasing environmental regulations and safety risks, considering the public's growing scrutiny over air pollution and safety issues. While the company has generally maintained a healthy operating track record over the past few years, an accident in HTP's Korea-based plant in 2019 led to government investigations and some operational disruptions.

The ratings also consider HTP's high dividend payout ratios during its investment cycle in 2017-19. Nevertheless, HTP has a track record of flexibly managing its dividend payments, as illustrated by its decision not to pay any dividend in 2014.

The outlook could return to stable if HTP significantly increases its earnings or reduces debt, such that adjusted debt/EBITDA remains below 2.0x on a sustained basis.

Moody's could downgrade HTP's ratings if the company's financial metrics remain weak, such that adjusted debt/EBITDA exceeds 2.0x on a sustained basis, against the backdrop of continued weak industry conditions or a further increase in debt.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Hanwha Total Petrochemical Co., Ltd. is a leading vertically integrated petrochemical manufacturer in Korea, with total annual production capacity of about 12.1 million tons as of the end of September 2019. Its key products include base chemicals, polymers, and energy products. It is 50%-owned by Hanwha General Chemical Co., Ltd., and 50%-owned by Total S.A. (Aa3 stable) through its subsidiary, Total Holdings U.K. Limited.

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.

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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.

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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.

Wan Hee Yoo
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

Chris Park
Associate Managing Director
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

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