Fitch Ratings has affirmed Saudi Basic Industries Corporation’s (SABIC) long-term issuer default rating (IDR) at A’, senior unsecured rating at A+ and short-term IDR at F1. The outlook on the long-term IDR is stable. The senior unsecured rating on SABIC Capital’s guaranteed bonds has also been affirmed at A+.
Strong Credit Profile: The ratings reflect SABIC’s vertically integrated operations, state of the art world-scale production facilities and access to competitively priced natural gas feedstock in Kingdom of Saudi Arabia (KSA, ‘AA-‘/Positive). The latter translates into best-in-class profitability levels and robust pre-capex cash flow generation through the cycle. This in turn mitigates the inherent cyclicality in SABIC’s markets (petrochemicals, fertilisers, metals) and has limited the cash flow impact of the group’s large expansion projects and associated cost overrun or delays in the past. In Fitch’s view, SABIC’s standalone business and financial profile already embed any benefits from its state-ownership.
Headroom for European Challenges: Fitch believes that the group’s credit metrics offer sufficient headroom for the costs (undisclosed) associated with the announced restructuring of the European operations. These businesses are suffering from weak demand and intensifying competition in their regional markets and their performances contrast sharply with those of the KSA operations. SABIC has announced rationalisation measures aimed at optimizing its cost structure and its footprint, including a 1,050 reduction in staff count. Fitch’s base case does not assume any improvement in performance in Europe in 2013.
Progress on Capex: The ratings also reflect the progress to date on SABIC’s expansion programme, with reduced execution risk and increasing contributions to cash flow generation from debt-funded projects. Under Fitch’s base case, and in contrast with historical trends, SABIC continues to generate positive free cash flow (FCF) over the rating horizon, despite sustained high levels of investments.
New Expansion Projects: Ongoing expansion projects include a 400ktpa elastomer production site in KSA through Kemya, the 50/50 joint venture (JV) with ExxonMobil Corporation, a 260ktpa polycarbonate plant in China through SSTPC, the 50/50 JV with China Petroleum and Chemical Corporation (Sinopec, ‘A’/Stable) and a 330ktpa n-butanol plant in KSA through a newly formed JV with Sadara and Saudi Acrylic Acid Co. The projects have a total cost of around USD5.6bn. The resurgence of expansion capex, albeit at lower levels than in 2007-2011, translates in funds from operations (FFO) adjusted gross leverage of 2.1x in 2013 under Fitch’s forecasts, with gradual deleveraging afterwards.
Group Structure: The ratings also factor in the group’s structure, with a large portion of consolidated earnings generated by partly-owned operating companies. In Fitch view, the associated risks (structural subordination, restricted access to cash flow or reliance on dividend payments) are mitigated by SABIC’s management control over these entities, the stable stream of dividends and fees historically received by the holding company, the high level of operational integration across the group, and large cash balances maintained at the holding company.
Strong Liquidity: Liquidity is expected to remain robust, with projected net FFO leverage below 1.0x, under the base case. Given its structure, Fitch would expect SABIC to maintain larger cash balances and lower net leverage ratios through the cycle than peers at the same rating level. Liquidity was strong at end-Q113 with cash positions of SAR66bn. This compared with maturing debt of SAR15bn. SABIC also had unused committed lines of around SAR5.3bn and short-term deposits (between three months and one year) of SAR11.5bn at end-Q113.
Base Case Assumptions: Fitch’s base rating case conservatively forecasts low single digit growth in 2013, reflecting ramping up capacity (Saudi Kayan), and a soft demand and pricing environment. The agency assumes that EBITDA margin will be at around 28% (28.8% in 2012). A mild recovery is assumed in 2014-2015. Key risks to Fitch’s forecasts are a return to recessionary market conditions, with slower growth in Asia, lower demand for petrochemical products against the backdrop of large capacity additions in the Gulf Co-operation Council region and China, and resulting pricing pressure and margin erosion.
Potential Hurdles Ahead: In the medium term, the ethane price of USD0.75/mmbtu currently enjoyed by Saudi petrochemical producers could increase, thus eroding their profitability. However, the agency believes that such a price hike would be unlikely to pose a threat to their competitiveness on the international markets. New shale-base ethylene capacity in the US could also disrupt market balance and put pressure on prices.