Tuesday, Mar 28, 2006
The affirmation of AAAID and AAAID(s) assigned to Optimal Olefins (Malaysia) Sdn Bhd’s (“Olefins”), Optimal Glycols (Malaysia) Sdn Bhd and Optimal Chemicals (Malaysia) Sdn Bhd’s (“G&C”) debt issuance respectively reflect the Optimal Group of companies’ (“Optimal Group”) competitive edge in the petrochemical industry, stemming from its large-scale vertical operational integration; strong shareholders’ support; ample feedstock supply; well-equipped infrastructure; and its proximity to the world’s markets. The suffix (s) accorded to the G&C issue denotes the strength of support provided by the sponsors, Petroliam Nasional Berhad (PETRONAS) and Union Carbide Corporation (UCC) [with a corporate guarantee from The Dow Chemicals Company (Dow)] in the form of cash deficiency support to meet cash shortfall in servicing the obligations under the bonds and USD term loan.
Located in the PETRONAS Petroleum Industry Complex (formerly known as KIPC), primary products of Olefins i.e. ethylene and propylene are the requisite feedstock for both G&C’s production. This integrated nature not only allows Optimal Group the flexibility to adjust its production mix to maximize returns to the Group but also lessens the Group’s exposure to the volatility of the commodity pricing.
Supply risk for Olefins is minimal because the integrated pipeline in the petrochemical complex provides a consistent supply of natural gas to Olefins through the long-term supply agreement with PETRONAS with a favourable pricing structure compared to other producers in the region. The take-or-pay provision in Olefins’ ethylene sale agreement ensures that a minimum quantity is purchased by its offtakers. To date, the minimum requirements set under these agreements had been fulfilled by the offtakers. For G&C, although the distribution agreement with Union Carbide Customers Services Pte. Limited (UCCS) does not represent a take-or-pay obligation on the latter, demand risk is substantially mitigated by leveraging on Dow’s strength in the world distribution network and its undertaking to give preference to G&C over products produced at other Dow-owned and controlled production units at specified territories. MARC views demand risk for Optimal Group’s products as low given that these derivatives are common raw materials used extensively in producing a wide spectrum of products for daily uses. To date, Dow has fulfilled its minimum volume obligations under the distribution agreement.
For the nine months period ended December 2005, Olefins recorded a profit before interest and tax of RM694 million on the back of RM1,220 million in revenue. As expected, Olefins achieved a healthy double digit operating profit margin of 57%. On the other hand, operating profit margins for G&C were affected by the downturn in petrochemical product prices and unplanned shutdown at Olefins’ plant. Nevertheless, given the pricing cyclicality of petrochemical products, there are unique features within the structure to reduce any liquidity risk arising from either a downturn in the petrochemical cycle or short-term working capital mismatch. These are the maintenance of a six-month liquidity buffer in the Debt Service Reserve Account (DSRA), and the Special Reserve Account in the Olefins’ structure to capture at least 35% of total principal outstanding. Most importantly, the shareholders’ undertaking to meet cash shortfall of up to 30% of the principal outstanding in the G&C structure provides added financial flexibility. In addition, the G&C’s flexibility to vary product mix enables them to focus on products with prevailing high market prices.
Pursuant to the DOSH requirement, the complex is currently undergoing a planned turnaround commencing on 26 January 2006 for approximately 68 days, which should ideally enhance the plant’s reliability and efficiency. Given their substantial investments in the plants, the operational efficiency as well as reputation of the Optimal Group is of utmost importance to the sponsors.
Located in the PETRONAS Petroleum Industry Complex (formerly known as KIPC), primary products of Olefins i.e. ethylene and propylene are the requisite feedstock for both G&C’s production. This integrated nature not only allows Optimal Group the flexibility to adjust its production mix to maximize returns to the Group but also lessens the Group’s exposure to the volatility of the commodity pricing.
Supply risk for Olefins is minimal because the integrated pipeline in the petrochemical complex provides a consistent supply of natural gas to Olefins through the long-term supply agreement with PETRONAS with a favourable pricing structure compared to other producers in the region. The take-or-pay provision in Olefins’ ethylene sale agreement ensures that a minimum quantity is purchased by its offtakers. To date, the minimum requirements set under these agreements had been fulfilled by the offtakers. For G&C, although the distribution agreement with Union Carbide Customers Services Pte. Limited (UCCS) does not represent a take-or-pay obligation on the latter, demand risk is substantially mitigated by leveraging on Dow’s strength in the world distribution network and its undertaking to give preference to G&C over products produced at other Dow-owned and controlled production units at specified territories. MARC views demand risk for Optimal Group’s products as low given that these derivatives are common raw materials used extensively in producing a wide spectrum of products for daily uses. To date, Dow has fulfilled its minimum volume obligations under the distribution agreement.
For the nine months period ended December 2005, Olefins recorded a profit before interest and tax of RM694 million on the back of RM1,220 million in revenue. As expected, Olefins achieved a healthy double digit operating profit margin of 57%. On the other hand, operating profit margins for G&C were affected by the downturn in petrochemical product prices and unplanned shutdown at Olefins’ plant. Nevertheless, given the pricing cyclicality of petrochemical products, there are unique features within the structure to reduce any liquidity risk arising from either a downturn in the petrochemical cycle or short-term working capital mismatch. These are the maintenance of a six-month liquidity buffer in the Debt Service Reserve Account (DSRA), and the Special Reserve Account in the Olefins’ structure to capture at least 35% of total principal outstanding. Most importantly, the shareholders’ undertaking to meet cash shortfall of up to 30% of the principal outstanding in the G&C structure provides added financial flexibility. In addition, the G&C’s flexibility to vary product mix enables them to focus on products with prevailing high market prices.
Pursuant to the DOSH requirement, the complex is currently undergoing a planned turnaround commencing on 26 January 2006 for approximately 68 days, which should ideally enhance the plant’s reliability and efficiency. Given their substantial investments in the plants, the operational efficiency as well as reputation of the Optimal Group is of utmost importance to the sponsors.