Fitch Ratings (Thailand) Limited has today assigned National Long-term ratings of ‘AA-(tha)’ (AA minus(tha)) to Thai Oil Public Company Limited’s (TOP) new unsecured and unsubordinated debentures with the issue size of THB5bn to THB10bn and up to seven year maturity.
The Outlook is Stable.
The proceeds from these new debentures will be earmarked for working capital, refinancing and capex.
The ratings reflect TOP’s strategic and operational links to PTT Public Company Limited (PTT) as a major refinery, its large scale, highly complex production capacity and its cost competitiveness. In addition, TOP’s forward integration into aromatics and lube base oil production has increased its oil value chain and reduces the volatility of its refining margins. Also, its move into the power business should help partially offset the earnings volatility of the refining business, although the contribution of this to EBITDA is relatively small.
The ratings are also supported by TOP’s strong financial position. Fitch expects the increase in TOP’s financial leverage, as measured by adjusted net debt/operating EBITDAR, in 2008 to be temporary. TOP’s net debt rose significantly to THB44bn at end-September 2008 from THB28bn at end-2007 given the substantial increase in working capital requirement for 9M08 due to the spike in oil prices. Together with weakened operating EBITDAR and funds from operations (FFO), its adjusted net debt to last-twelve-month (LTM) operating EBITDAR and LTM FFO adjusted net leverage increased to 2.0x in 9M08, compared with 1.1x and 1.0x, respectively, in 2007. Nevertheless, with expected lower capex and working capital requirements, Fitch expects TOP’s financial leverage to decline in 2009 and 2010.
TOP’s key credit concerns include its high vulnerability to oil prices and gross refinery margin (GRM) fluctuations, as well as the cyclicality of the petrochemicals business. TOP is also exposed to supply risks owing to its high dependence on foreign oil supplies. Also, the oil refinery and aromatics industries are facing cyclical downturns in 2009-2010, driven by the arrival of significant new capacity. A possible sharp decline in demand is likely to intensify the down cycle. Other credit concerns relate to its high customer concentration and its exposure to both a single production site and a single market. However, customer concentration risk is partly mitigated by the fact that PTT, the largest offtaker, is the dominant company in oil marketing and trading in Thailand and highly rated at ‘AAA(tha)’.
The Stable Outlook reflects the company’s relatively strong market position, supported by its cost competitiveness and a conservative financial policy. Prolonged high financial leverage, in which TOP is not able to bring its adjusted net debt to EBITDAR down to 1.0x by 2010 or an average GRM (excluding inventory gains and losses) sustained at below USD3.5 per barrel for 18-24 months, could negatively affect the ratings.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.