Optimal Glycols (Malaysia) Sdn Bhd and Optimal Chemicals (Malaysia) Sdn Bhd - 2007

MARC has reaffirmed its AAAID(s) ratings on Optimal Glycols (Malaysia) Sdn Bhd’s (‘Glycols’) and Optimal Chemicals (Malaysia) Sdn Bhd’s (‘Chemicals’) RM453 million and RM567 million Bai Bithaman Ajil Islamic Debt Securities (‘BaIDS’) respectively. The ratings carry stable outlook. The ratings assigned to both Glycols’ and Chemicals’ issues reflect credit enhancement in the form of a contractual obligation on the part of each project sponsor, Petroliam Nasional Berhad (‘Petronas’) and Union Carbide Corporation (‘UCC’), to provide debt service support on a several basis up to 30% of the outstanding amount of Glycols’ and Chemicals’ BaIDS, subject to a floor of USD52 million for both entities on a combined basis. UCC’s obligation to provide sponsor support is backed by a corporate guarantee from The Dow Chemical Company (‘Dow’). Both Petronas and Dow have implied corporate credit ratings of AAA. The ratings also reflect cost structure advantages and savings arising from the integrated production process of Olefins, Glycols and Chemicals; secured supply of feedstocks, catalysts and utilities; the benefits of leveraging on Dow’s world-class production technology, and strong global presence and distribution network. The above positives are tempered by the volatility in margins and earnings, margin pressure with rising feedstock prices and challenges in relation to maintaining high operating rates of an integrated plant. Of the two entities, Chemicals possesses a stronger stand alone risk profile than Glycols, notably on account of its modest ongoing capital expenditure requirements, relative to operating cash flow, and relatively higher earnings generation capacity.

Glycols and Chemicals are joint venture companies established by Petronas (50%) and UCC (50%). Glycols is a producer and supplier of ethylene oxide and glycols and co-product di-ethylene glycol. Apart from Chemicals, Glycols also sells its output to countries in the Asia Pacific through Union Carbide Customer Services Pte Ltd (‘UCCS’) under an exclusive 10-year renewable Distribution Agreement. Chemicals is a producer and supplier of various solvents, intermediates, monomers and performance products. Chemicals sells its output, outside Malaysia, to countries in the Asia Pacific through UCCS and Malaysian International Trading Corporation Sdn Bhd (‘MITCO’), a wholly-owned subsidiary of Petronas. Glycols and Chemicals are assured of secured supply of feedstocks and catalysts from Optimal Olefins (Malaysia) Sdn Bhd (‘Olefins’) and other third parties under various long term agreements.

Glycols’ revenue of RM1.49 billion in FY2007 was 46.9% higher than its FY2006’s revenue of RM1.02 million. Earnings before interest and tax (‘EBIT’) margin improved from -1.4% in FY2006 to 4.9% in FY2007. Profit before tax rebounded from a pre-tax loss of RM44.5 million in FY2006 to a profit of RM45.6 million in FY2007.

Chemicals’ revenue expanded by 26.1% to RM2.00 billion in FY2007. EBIT margin improved from 6.3% to 10.0% in FY2007. Profit before tax moved in line with profit margin which dipped in FY2006 and recovered in the following year.

Glycols and Chemicals were in compliance with its covenanted maximum joint debt to equity ratio (DE ratio) of 2.33 times and adjusted debt service cover ratio (‘ADSCR’) of 1.20 times given its DE ratio of 1.25 times and ADSCR of 1.59 times as at 31 March 2007.

Major Rating Factors

Strengths

• Financially strong and capable sponsors, Petronas and Union Carbide Corporation (‘UCC’);
• Debt Service Support provided by Petronas and UCC with UCC’s obligation backed by a corporate guarantee from The Dow Chemical Company (‘Dow’);
• Cost advantages arising from integrated nature of production process of Olefins, Glycols and Chemicals;
• Global distribution capabilities of Malaysian International Trading Corporation Sdn Bhd (‘MITCO’) and Dow; and
• Secured supply of feedstocks, catalysts and utilities.

Challenges/Risks

• Uneven financial performance, margin pressure; and
• Sensitivity of financial performance to plant availability