Monday, Apr 14, 2003
The AAA(s)ID (triple A, support, Islamic debt) rating assigned to PETRONAS Fertilizer (Kedah) Sdn Bhd (PFK)’s BaIDS reflects the strength of the support provided by the holding company, Petroliam Nasional Berhad (PETRONAS), in ensuring the timely and full redemption of the BaIDS, either through equity, loan facilities, grants or other means.
PFK, a wholly-owned subsidiary of PETRONAS, benefits from PETRONAS’ expertise and experience in operating the ammonia/urea plant owned by its subsidiary, ASEAN Bintulu Sdn Bhd (ABF). PFK’s plant is located in Gurun, Kedah while its Urea Export Terminal (UET) is in Butterworth, Penang. The operation and maintenance of the plant is undertaken in-house, assisted by technical expertise from its original equipment manufacturers. PFK has a proven track record of operational stability since commencement of operations. However, risks such as unplanned shutdowns are inherent in PFK’s operations.
With the current annual capacity of 660,000 metric tonne (mt) of granular urea, PFK exports about 65% of its products to Thailand, Australia and other South East Asian agricultural countries, whilst the remaining is sold to the National Farmers Association (NAFAS), the nation’s largest urea consumer, for distribution in Malaysia. PFK’s proximity to major urea consuming markets in South East Asia and reliable supply track record provide the company with the competitive edge over Middle East fertilizer producers. PFK’s exposure to the main raw material, natural gas, is mitigated through a 20-year Gas Supply Agreement with PETRONAS, which ensures continuous supply of natural gas at fixed prices.
To reduce the risk of uncertainty of urea sales in the spot market, PFK intends to continue to maintain a target ratio of 80:20 for long term contracts and spot sales respectively. However, as term sales’ prices are index-linked, PFK is exposed to urea market price fluctuations, which is cyclical by nature, due to, amongst others, short term factors such as natural gas costs, agricultural cycle and weather patterns and/or long term factors, namely population growth and economic development. The US dollar-denominated contracts with all foreign customers provide PFK with a natural hedge to a certain extent. In addition, PFK markets its products through Malaysian International Trading Corporation Sdn Bhd (MITCO), a wholly-owned subsidiary of PETRONAS. MITCO acts as the marketing arm for PFK; PFK’s collection risk is moderated by the obligation of MITCO to pay PFK within 30 days after each delivery order date (except for sales whereby credit term is longer than 30 days).
PFK has been recording operating profits over the last few years. However, due to high financing cost incurred by PFK in respect of existing borrowings taken to fully finance the construction of the plant, the company has been in a net loss position. The BaIDS will be utilized to refinance PFK’s existing borrowings, which would result in a significant interest cost saving for the company. The serial nature of the BaIDS would help to gradually reduce PFK’s debt leverage to within the covenanted levels.
PFK’s finance service coverage ratios (FSCR) have been on an upward trend in the last three years, depicting amongst others, prompt cash payments from MITCO. Its cash flow projection indicates a fairly strong ability to meet financing obligations with minimum and average FSCRs of 3.4 times and 5.4 times respectively. MARC’s stress test analysis reveals comfortable FSCRs of above the covenanted ratio of 1.2 times, after taking into account the restriction on the redemption of preference shares; the redemption will only be allowed if the forward FSCR is not less than 1.2 times. The creation of a reserve account would help to cover any shortfall in meeting the redemption of either primary or secondary notes. PFK’s strong financial flexibility is drawn from the strength of its parent, PETRONAS.
PFK, a wholly-owned subsidiary of PETRONAS, benefits from PETRONAS’ expertise and experience in operating the ammonia/urea plant owned by its subsidiary, ASEAN Bintulu Sdn Bhd (ABF). PFK’s plant is located in Gurun, Kedah while its Urea Export Terminal (UET) is in Butterworth, Penang. The operation and maintenance of the plant is undertaken in-house, assisted by technical expertise from its original equipment manufacturers. PFK has a proven track record of operational stability since commencement of operations. However, risks such as unplanned shutdowns are inherent in PFK’s operations.
With the current annual capacity of 660,000 metric tonne (mt) of granular urea, PFK exports about 65% of its products to Thailand, Australia and other South East Asian agricultural countries, whilst the remaining is sold to the National Farmers Association (NAFAS), the nation’s largest urea consumer, for distribution in Malaysia. PFK’s proximity to major urea consuming markets in South East Asia and reliable supply track record provide the company with the competitive edge over Middle East fertilizer producers. PFK’s exposure to the main raw material, natural gas, is mitigated through a 20-year Gas Supply Agreement with PETRONAS, which ensures continuous supply of natural gas at fixed prices.
To reduce the risk of uncertainty of urea sales in the spot market, PFK intends to continue to maintain a target ratio of 80:20 for long term contracts and spot sales respectively. However, as term sales’ prices are index-linked, PFK is exposed to urea market price fluctuations, which is cyclical by nature, due to, amongst others, short term factors such as natural gas costs, agricultural cycle and weather patterns and/or long term factors, namely population growth and economic development. The US dollar-denominated contracts with all foreign customers provide PFK with a natural hedge to a certain extent. In addition, PFK markets its products through Malaysian International Trading Corporation Sdn Bhd (MITCO), a wholly-owned subsidiary of PETRONAS. MITCO acts as the marketing arm for PFK; PFK’s collection risk is moderated by the obligation of MITCO to pay PFK within 30 days after each delivery order date (except for sales whereby credit term is longer than 30 days).
PFK has been recording operating profits over the last few years. However, due to high financing cost incurred by PFK in respect of existing borrowings taken to fully finance the construction of the plant, the company has been in a net loss position. The BaIDS will be utilized to refinance PFK’s existing borrowings, which would result in a significant interest cost saving for the company. The serial nature of the BaIDS would help to gradually reduce PFK’s debt leverage to within the covenanted levels.
PFK’s finance service coverage ratios (FSCR) have been on an upward trend in the last three years, depicting amongst others, prompt cash payments from MITCO. Its cash flow projection indicates a fairly strong ability to meet financing obligations with minimum and average FSCRs of 3.4 times and 5.4 times respectively. MARC’s stress test analysis reveals comfortable FSCRs of above the covenanted ratio of 1.2 times, after taking into account the restriction on the redemption of preference shares; the redemption will only be allowed if the forward FSCR is not less than 1.2 times. The creation of a reserve account would help to cover any shortfall in meeting the redemption of either primary or secondary notes. PFK’s strong financial flexibility is drawn from the strength of its parent, PETRONAS.