Press Releases MARC AFFIRMS AAAID(S) ISLAMIC DEBT RATINGS OF OPTIMAL GLYCOLS AND OPTIMAL CHEMICALS

Friday, Mar 18, 2011

MARC has affirmed its ratings of AAAID(S) on the respective Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDs) issuances of Optimal Glycols (Malaysia) Sdn Bhd (Glycols) and Optimal Chemicals (Malaysia) Sdn Bhd (Chemicals) with a stable outlook. The rating actions affect RM155 million of outstanding BaIDS issued by Glycols and RM185 million of outstanding BaIDS issued by Chemicals.

The ratings have been affirmed on the basis of partial credit support provided for the rated obligations by ultimate holding company of Glycols and Chemicals, Petroliam Nasional Berhad (Petronas). Petronas has retained an ultimate majority ownership interest in the two entities following the consolidation of Petronas Group's petrochemicals businesses under Petronas Chemicals Group Berhad (Petronas Chemicals) and the listing of shares of Petronas Chemicals on the local stock exchange. Petronas maintains a 69% ownership in Petronas Chemicals, which in turn holds 100% equity stake in Glycols and Chemicals respectively. MARC believes that the organisational restructuring will have no impact on Petronas' (rated AAA/Stable on public information basis) commitment to Glycols and Chemicals.

Petronas' continuing obligation to provide debt service support for the rated issuances up to 30% of the outstanding amount of Glycol's and Chemicals' BaIDS subject to a floor of USD52.0 million for both entities on a combined basis provides both entities considerable flexibility to withstand periods of market volatility and operating cash flow deficits. MARC's parental support assumption also considers the strategic fit of Glycol and Chemicals with Petronas Group's downstream businesses, the vertically integrated nature of the group's petrochemicals businesses, as well as the entities' access to cost-advantaged natural gas-based feedstock sourced from Petronas Group. Glycols produces intermediate products whilst Chemicals produces basic and specialty chemical products for a broad range of industries including personal care products, pharmaceuticals, paints and packaging.

The ratings also incorporate a weaker financial performance for the 12 months ended March 31, 2010 (FY2010) at Chemicals, following which MARC expects full year FY2011 earnings and cash flow generation to improve in line with recovery of the global chemicals industry. Chemicals, which still maintains the stronger stand alone credit profile of the two entities, posted a pre-tax loss of RM54.0 million in FY2010 amid cyclical declines in demand caused by the global recession. Meanwhile, Glycols which sells ethylene oxide to Chemicals pursuant to a long-term 'take or pay' contract expiring in 2023 recorded a pre-tax profit of RM68.9 million. MARC notes that both entities maintained compliance with their gearing and debt service cover ratio (DSCR) financial covenants in FY2010.

MARC believes that the financial performance of the two individual entities remains sensitive to many variables including general economic conditions, feedstock prices, geo-political risks and currency movements, going into FY2012. MARC also views the credit profiles of Glycols and Chemicals as closely linked in light of the strategic, operational and financial relationships between the two entities. Glycols derives a substantial majority of its revenue from sales to Chemicals (FY2010: 72%, FY2009: 66%).

As at September 30, 2010, both entities have sufficient liquidity to cover the next six months' debt service. There is, however, a possibility that Glycols may require external funding support to meet its 2011 BaIDs and USD-denominated term loan maturities if its cash flow generation does not benefit sufficiently from a recovery in end-market conditions.

MARC expects Chemicals' principal liquidity sources, its cash balances and free cash generation to provide adequate coverage of its maturing debt over the next 12 months. Chemicals continued to generate sustained positive free cash flow in FY2010 of RM42.9 million, albeit significantly reduced from RM312.7 million the year before. Its cash and cash equivalents stood at RM242.8 million as at March 31, 2010.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/
sandeep@marc.com.my;
Khairul Emran Mahmud, +603-2082 2278/
emran@marc.com.my;
David Lee, +603-2082 2255/
david@marc.com.my.