Optimal Glycols (M) Sdn Bhd & Optimal Chemicals (M) Sdn Bhd - 2009

MARC has revised its ratings on OPTIMAL Glycols (Malaysia) Sdn Bhd’s (Glycols) and OPTIMAL Chemicals (Malaysia) Sdn Bhd’s (Chemicals) (jointly known as Glycols & Chemicals) RM453.0 million and RM567.0 million Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) respectively to AAAID from AA+ID(s) and at the same time removed the ratings from MARCWatch Positive where they were first placed on September 15, 2009. The rating outlook is stable.

The rating actions reflect alignment of Glycols & Chemicals’ ratings to MARC’s public information corporate credit rating on Petroliam Nasional Berhad (PETRONAS) upon both entities becoming wholly-owned subsidiaries of PETRONAS. Since the September 15 MARCWatch Positive placement of Glycols & Chemicals’ ratings, The Dow Chemical Co has completed its disposal of its shareholdings in Glycols & Chemicals and OPTIMAL Olefins (Malaysia) Sdn Bhd (Olefins) to PETRONAS. The former ratings of AA+ID(s) had reflected MARC’s assessment of the credit quality of debt service support extended by PETRONAS and wholly-owned Dow subsidiary, Union Carbide Corporation, on a several basis.

The decision to align the ratings takes into account operational and strategic ties between Glycols & Chemicals and PETRONAS, in particular the operational infrastructure support provided by PETRONAS to both entities and the overall significance of their operations to PETRONAS’ downstream businesses. The considerable equity investment PETRONAS has made in both entities and its 100% ownership in both entities provide further support to MARC’s view that Glycols & Chemicals are strongly linked to PETRONAS. PETRONAS also has a continuing obligation to provide debt service support for the rated issuances of up to 30% of the outstanding amount of Glycols’ and Chemicals’ BaIDS and US dollar term loans, subject to a floor of USD52.0 million for both entities on a combined basis. The foregoing gives Glycols & Chemicals access to parent liquidity to fund shortfalls in debt service requirements under their respective BaIDS issuances.

Wholly-owned by the Malaysian government, PETRONAS is involved in a wide spectrum of oil and gas operations, both locally and globally. MARC continues to maintain a long-term public information rating of AAA/Stable on PETRONAS on the basis of its strong operating profile, which continues to be reflected in its industry-leading profitability (Return on Revenue and  Return on  Assets of 33.7% and 23.0%  for  the financial year ended March 31, 2009 (FY2009), strong balance sheet with low gearing and excellent financial flexibility. PETRONAS’ favourable reserve replacement metrics, its consistently strong cash flow generation and conservatively managed financial position underpin its stable rating outlook.

MARC expects Chemicals to continue being able to fund its working capital requirements, capital expenditure (capex) and debt repayments with internally generated cash. The company has been able to preserve robust credit metrics with strong cash flows from operation (CFO) even during the recent global economic downturn. Chemicals’ revenue improved 10.9% year-on-year to RM1.9 billion in FY2009 with no unplanned plant outage recorded during the year. Chemicals’ profitability was sustained by significantly higher product prices during the first half of FY2009 which more than offset the impact of the decline in prices during the second half of FY2009. For FY2009, Chemicals generated CFO of RM330.9 million, up from RM302.3 million the year before. As of March 31, 2009, Chemicals had a cash balance of RM379.1 million, which is higher than its short-term borrowings of RM117.0 million. Its ample liquidity position implies a very low likelihood that parent financial support will be required for its debt servicing needs.

Of the two subsidiaries, Glycols continues to demonstrate greater volatility in its earnings performance. Although Glycols’ revenue increased by 17% to RM1.3 billion in FY2009 with higher plant utilisation during the year, it registered a pre-tax loss of RM23.7 million (FY2008: profit of RM19.3 million) due to downward pressure on product prices amid reduced demand, and a foreign exchange translation loss arising from its US dollar term loan. Notwithstanding, Glycols was able to report a positive CFO of RM185.7 million. Cash outflows for capex were lower than CFO, leading to a free cash flow of RM163.6 million. Glycol’s CFO was sufficient to cover its BaIDS and US dollar term loan repayments of RM68.0 million and RM24.3 million respectively. A drawdown of RM236.6 million which was made under a revolving credit facility was also subsequently repaid in full during the year. MARC is of the view that refinancing risk at Glycols will be largely mitigated by its strong financial flexibility which is likely to have been enhanced subsequent to the company becoming a wholly-owned subsidiary of PETRONAS.  MARC believes that Glycols’ near-term financial performance will continue to be challenged by uncertain global economic recovery despite some indication of a rebound in domestic production and export of chemicals since March 2009.

Glycols and Chemicals remained in compliance with the financial ratio covenants under the rated facilities, which are computed on a combined entity basis. Glycols & Chemicals’ adjusted DSCR and debt-to-equity ratio for FY2009 were 2.68 times and 0.50 times respectively against covenanted levels of 1.20 times and 2.33 times respectively.

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