MARC has reaffirmed the rating of AAAID to Optimal Olefins (Malaysia) Sdn Bhd’s (‘Olefins’) debt issuance and AAAID(s) to Optimal Glycols (Malaysia) Sdn Bhd (‘Glycols’) and Optimal Chemicals (Malaysia) Sdn Bhd’s (‘Chemicals’) (both Glycols and Chemicals referred to as ‘G&C’) debt issuances respectively. The ratings continue to reflect the Optimal Group of companies’ (Optimal Group) well established large-scale vertical integrated production lines, competitive edge in the petrochemical industry, strong shareholders’ support, ample feedstock supply from Petroliam Nasional Berhad (PETRONAS), well equipped infrastructure with various sales and purchase agreements for its product demand, and its proximity to the world’s markets. The suffix (s) accorded to the G&C issues denotes the strength of support provided by the sponsors, PETRONAS and Union Carbide Corporation (UCC) in the form of cash deficiency support to meet cash shortfall in servicing the obligations under the bonds and USD term loan. UCC’s support is backed by corporate guarantee from its holding company, The Dow Chemical Company (Dow).

Located in the PETRONAS Petroleum Industry Complex (formerly known as KIPC), primary products of Olefins i.e. ethylene and propylene are the requisite feedstocks for both G&C’s production. This integrated nature not only allows Optimal 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.

The integrated pipeline in the petrochemical complex provides a consistent supply of natural gas to Olefins. Olefins has minimal feedstock supply risk through the long-term supply agreement with PETRONAS that provides a favourable pricing structure compared to other producers in the region. Product demand risk is also minimal for Olefins because 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 met 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, product 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 which are made from chemicals and/or plastics. To date, Dow has fully met its minimum volume obligations under the distribution agreement.

As deliberated in the previous annual review, Optimal Group was anticipated to experience a poorer performance in financial year ended 31 March 2006 mainly due to the planned and unplanned shutdown of its plants. For FY2006, Olefins recorded profit before interest and tax of RM615 million (FY2005:RM1,015 million) with total revenue of RM1,342 million (FY2005:RM1,604 million).  Glycols posted RM26 million (FY2005: RM163 million) and RM1,054 million (FY2005: RM1,219 million) of profit before interest and tax and revenue respectively, while Chemicals posted RM61 million (FY2005: RM221 million) and RM1,584 million (FY2005: RM1,584 million) of profit before interest and tax and revenue respectively.

For the recent five months period ended August 2006, Olefins recorded a profit before interest and tax of RM605 million on the back of RM903 million in revenue.  Year to date, Olefins continued to achieve a healthy double digit operating profit margin of 67.0% (FY2006:45.8%). On the other hand, Glycols recorded profit before interest and tax of RM30 million with revenue of RM550 million and Chemicals recorded profit before interest and tax of RM29.5 million with revenue of RM770 million. Year to date operating profit margins for G&C has improved marginally to 4.5% (FY2006:3.3%), but were still affected by the lower petrochemical product prices when compared to the high operating profit margin of 13.7% achieved in FY2005.  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 the added financial flexibility. In addition, the flexibility of G&C to vary product mix allows them to focus on products with prevailing high market prices.