Moody’s Investors Service has downgraded PTT Global Chemical Public Company Limited’s issuer rating and other ratings due to concerns about the company’s high leverage and challenging market conditions in the petrochemical sector.

Key Takeaways

  • Moody’s has downgraded PTT Global Chemical’s issuer rating and related notes due to the company’s high leverage and challenges in the petrochemical sector.
  • PTTGC’s ability to reduce its debt through internal cash flows will be hindered by industry conditions and soft demand for petrochemicals.
  • Despite the expected gradual earnings improvement over the next few years, PTTGC’s debt levels remain high and will likely exceed its current rating level.

PTTGC’s leverage has increased due to weak earnings and high debt levels following an acquisition. Moody’s expects the company’s ability to reduce its debt through internal cash flows to be hindered by industry conditions.

At the same time, Moody’s has downgraded (1) to Baa3 from Baa2 the rating on the backed senior unsecured notes issued by GC Treasury Center Company Limited (GCTC), a wholly-owned subsidiary of PTTGC; (2) to (P)Baa3 from (P)Baa2 the senior unsecured medium-term note (MTN) program rating under PTTGC; and (3) to (P)Baa3 from (P)Baa2 the backed senior unsecured MTN program rating under GCTC. Any issuance under the MTN program by GCTC will be unconditionally and irrevocably guaranteed by PTTGC.

The outlook on all ratings remains negative.

“The downgrade reflects our expectation that over the next 12–18 months, PTTGC’s leverage will unlikely decline to the levels appropriate for its previous ratings,” says Hui Ting Sim, a Moody’s Assistant Vice President and Analyst.

The negative outlook reflects the uncertainty over the company’s pace of deleveraging and debt reduction amid challenging market conditions in the petrochemical sector

Hui Ting Sim, a Moody’s Assistant Vice President and Analyst

Rarings rationale

PTTGC’s leverage, as measured by debt/EBITDA, was close to 21.0x during the 12 months ended June 2023. The spike in leverage was driven by weak earnings generation in the past 12 months combined with high debt levels following its primarily debt-funded acquisition in December 2021 of global resin producer, Allnex Holding GmbH. PTTGC’s adjusted EBITDA fell to THB15 billion during the 12 months ended June 2023 from THB27 billion and THB64 billion in 2022 and 2021, respectively.

Moody’s views that PTTGC’s ability to reduce its borrowings through internal cash flows over the next 12-18 months will continue to be hampered by challenging industry conditions that will pressure petrochemical margins. The agency expects demand for petrochemicals will likely remain soft as global economic growth slows this year and remains subdued in 2024. At the same time, petrochemical supply will grow significantly this year as new capacities come on stream.

Moody’s expects PTTGC’s earnings should increase gradually over 2023-24 from exceptionally weak levels over the past 12 months. The agency estimates that PTTGC’s adjusted EBITDA will be THB30 billion and THB43 billion in 2023 and 2024, respectively.

PTTGC’s adjusted debt fell by close to THB20 billion to THB306 billion as of June 2023 from the previous year as the company used some of its cash on hand to repay debt, but its adjusted net debt increased by around THB22 billion to THB274 billion during the period. Moody’s expects PTTGC will generate free cash flow of THB7 billion and THB12 billion in 2023 and 2024, respectively, which will support debt reduction of about THB10 billion by December 2024 from June 2023. However, such debt levels are high for PTTGC’s current rating level as Moody’s estimates that the company’s debt/EBITDA will remain in excess of 5.0x in 2024.

PTTGC’s Baa3 ratings are underpinned by its position as Thailand’s largest diversified petrochemical company, as well as by its long-term feedstock supply and product offtake agreements with its parent, PTT Public Company Limited (PTT, Baa1 stable). At the same time, the ratings are constrained by PTTGC’s high leverage and exposure to the inherent volatility in the refining and petrochemical sectors.

The Baa3 ratings continue to incorporate two notches of uplift, based on Moody’s assessment of likely extraordinary support from its parent, PTT, during a period of stress.

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