Credit Opinion: Saudi Basic Industries Corporation

Transcription

1 Credit Opinion: Saudi Basic Industries Corporation Global Credit Research - 28 Oct 2015 Riyadh, Saudi Arabia Ratings Category Outlook Issuer Rating SABIC Capital I B.V. Outlook Bkd Senior Unsecured SABIC Capital II B.V. Outlook Bkd Senior Unsecured Moody's Rating Stable A1 Stable A1 Stable A1 Contacts Analyst Phone Thomas S. Coleman/London Rehan Akbar/DIFC - Dubai Elena Nadtotchi/London David G. Staples/DIFC - Dubai Key Indicators [1]Saudi Basic Industries Corporation 6/30/2015(L) 12/31/ /31/ /31/ /31/2011 Revenues (USD Billion) $44.9 $50.2 $50.4 $50.4 $50.6 PP&E (net) (USD Billion) $46.6 $46.3 $45.7 $45.6 $45.4 EBITDA Margin % 28.4% 28.4% 30.2% 29.4% 32.3% ROA - EBIT / Average Assets 9.9% 11.5% 12.9% 12.5% 15.3% Debt / EBITDA 2.0x 1.9x 1.7x 2.0x 1.9x EBITDA / Interest Expense 19.2x 21.5x 21.7x 17.7x 14.6x Retained Cash Flow / Debt 18.5% 19.2% 28.2% 21.5% 30.7% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Strong market position and competitive low cost base - Resilient profitability through industry cycles

2 - Geographic and diversification into specialty chemicals - Lower capital spending cycle and de-leveraging - Supportive government role Corporate Profile SABIC, headquartered in Riyadh, Kingdom of Saudi Arabia (KSA, Aa3 stable), is a diversified industrial conglomerate, principally active in petrochemicals, fertilisers, metals and performance plastics, with consolidated revenues of SAR168.4 billion as of LTM ending on June 30, Established by Royal Decree in 1976, SABIC is 70% owned by KSA and falls within the scope of Moody's rating methodology for government-related issuers (GRIs). Rating Rationale SABIC's A1 rating reflects its strong global positions in petrochemical and fertiliser markets in a presence built up over the past three decades, as well as its highly competitive cost position, underpinned by significant economies of scale and access to competitively priced feedstock under long-term contracts with Saudi Aramco. These advantages help mitigate the volatility of its predominantly commodity-based petrochemical, fertiliser and steel activities, and significant fluctuations in supply and demand that affect its markets through industry and economic cycles. In addition, since 2010 SABIC has emerged from a period of heavy capital spending and negative free cash flow, leading to increased profitability, reduced debt, and an improved financial profile. Our Baseline Credit Assessment (BCA) for SABIC is a1, the same level as its long-term debt. While SABIC benefits from strong support and high dependence under our GRI methodology, its debt is not guaranteed by the government and we maintain a moderate distinction between the ratings of the Kingdom of Saudi Arabia and those of its strongly supported GRIs. DETAILED RATING CONSIDERATIONS STRONG MARKET POSITION WITH COMPETITIVE COST BASE SABIC is the second largest diversified chemical company globally after BASF (A1 stable), focusing on petrochemicals, fertilisers and metals, with reported revenues of SAR188 billion in SABIC's global production reached 43 million metric tons of basic chemicals and 12 million metric tons of polymers in It operates 14 crackers globally, with 11 in KSA. SABIC enjoys leading market shares in a number of basic and intermediate products, including MTBE, ethylene glycol, polycarbonate, polyphenylene ether and methanol, as well as in polyolefins, ranking as one of the leading global producers of polyethylene and polypropylene. SABIC benefits from a highly competitive cost position underpinned by the significant economies of scale afforded by its world-scale vertically integrated facilities and by access to competitively priced feedstock sourced under long-term contracts with 100% government-owned Saudi Aramco, which has a firm commitment to satisfy its feedstock requirements. As a result, despite its primarily commodity based production, SABIC is well equipped to withstand sector downturns. RESILIENT PROFITABILITY DESPITE VOLATILE INDUSTRY CYCLES With almost 80% of its capacity in commodity chemicals and polymers, SABIC is largely a price-taker and remains highly exposed to petrochemical industry cycles, with EBITDA generation affected by swings in supply/demand balances. However, the company benefits from global scale and its highly competitive cost structure, and remains operationally well-positioned to maintain above average profitability during downturns. Current pressure on petrochemical pricing related to the low oil price environment and weak demand has caused its EBITDA margin to decline to 28.4% as of LTM ending in June 30, 2015 (relative to 30.2% as of year-end 2013), which still remains well above industry peers. STRATEGIC FOCUS ON GEOGRAPHIC AND SPECIALTY DIVERSIFICATION Over the past decade SABIC has diversified its operations geographically outside its core position in the Arabian peninsula, acquiring DSM's petrochemicals business in 2002, Huntsman Petrochemicals in 2006, GE Plastics in 2007 as well as partnering up with Sinopec in Tianjin, China in 2009 to build a strong presence in China and Europe and to further advance its specialty portfolio. About 20% of the company's total assets are now located outside of KSA.

3 One of SABIC's mandates is to expand operations to support KSA's downstream industrial diversification strategy. These efforts include (1) the USD3.4 billion Saudi Elastomers Project in Kemya, a joint venture with Exxon Mobil, which will produce synthetic rubber and is expected to be on-stream in 2016; (2) an agreement with Ma'aden and Mosaic to jointly develop a fully integrated phosphate production facility; and (3) SAMAC, a 50/50 joint venture with Mitsubishi Rayon that is building a methyl methacrylate (MMA) plant and a polymethylmethacrylate (PMMA, also known as acrylic plastic) plant in Jubail and which is expected to be completed by year-end In its metals segment, the company is undertaking feasibility studies on two steel plants for a total of USD4.2 billion with combined capacity of 2.5 million tons per year. Outside of KSA, the company is planning to convert its Teeside UK cracker to use low cost ethane feedstock imported from the US under a long-term contract. In high end plastics, the company is focusing on a new polycarbonate plant as an expansion of its joint venture with Sinopec (SSTPC), and will benefit from its proximity to China and other growth markets in Asia Pacific. More recently, SABIC in July 2015 announced the establishment of SABIC SK Nexlene Company - a 50/50 joint venture with SK Global Chemical Co. (Baa2 stable). The joint-venture company has a 230,000 tonne production capacity of high-performance polyethylene products in South Korea and will look to expand capacity further in the future. These geographic moves are aligned with the group's strategy to diversify into specialty products and expand along the chemical chain to reduce exposure to the volatile commodity petrochemical cycle. In addition to its production facilities, SABIC enjoys an extensive commercial and distribution infrastructure to reach a large and diverse customer base, including the growth markets of China and Asia. LOWER CAPEX CYCLE AND STRONGER CASH FLOW SUPPORT DE-LEVERAGING SABIC completed a major five year capital spending programme in 2011, investing more than SAR115 billion (USD31 billion) to commission large new production facilities, including Yansab, Sharq and Saudi Kayan, and ensure further volume growth. In 2014, SABIC reported total production of 69.7 million metric tons (a 48% expansion over 2005 levels), reflecting near full utilization of its plants in KSA and offsetting average utilization in its international operations. No major capital expenditure is planned during the period with annual spending expected to remain in line with the last four years at about 8% of sales. As petrochemical prices have been under pressure since the second half of 2014, operating profitability and cash flow generation have weakened for the industry in general as well as for SABIC. Funds from operations were down to SAR45.8 billion as of 30 June 2015 (LTM) from SAR57.1 billion a year earlier. Looking forward, given our expectation of a prolonged low oil price environment and muted global growth, we anticipate that over the next months SABIC's earnings and cash flow generation from its existing asset base will be somewhat lower than in previous years but yet will remain strong. Capital expenditures is anticipated to be in line with recent years and funded through internal cash flows, while we expect SABIC to maintain a positive free cash flow profile. Despite maintaining a relatively high dividend payout, SABIC has reduced total adjusted debt by over 20% since 2010 and cash-adjusted net debt by over 50% to SAR28.1 billion as of June Net Debt to EBITDA (on an adjusted basis) was at a cyclical low of 0.6x as of June 30, 2015, down from a peak 2.1x in The low net debt leverage reflects a substantial adjusted cash position of SAR68.1 billion (USD18.2 billion) of which about 70% is held at head office, compared to total adjusted debt of SAR96.2 billion (USD25.7 billion) as of June 30, Even with a more muted chemical cycle, SABIC should be able to maintain stronger credit metrics and financial flexibility, including Retained Cash Flow (RCF) to Net Debt above 60%. SUPPORTIVE GOVERNMENT ROLE IN SAUDI ARABIA The government of Saudi Arabia does not explicitly guarantee SABIC`s debt, nor can the company be viewed as an agency-like arm of the government, despite fulfilling a strategically important mandate. At the same time, SABIC benefits from a supportive environment in Saudi Arabia, with five out of its seven board members (including its Chairman and Vice Chairman/CEO) directly appointed by the government. It enjoys competitively priced feedstock and access to long-term funding from government-related agencies to support the financing of projects. It also benefits from the favourable tax treatment accorded to corporate entities in KSA, which keeps its effective tax rate low. Moody's assumes strong government support for SABIC based on its ownership and instrumental role in supporting the diversification of the Saudi Arabia's economy and job creation in the non-oil export sector. High dependence takes account of the strong links between SABIC and its majority owner. The 30% stake held by Saudi citizens and citizens of other GCC countries represents an effort to broaden share ownership but does not weaken government oversight of SABIC. Note that, despite the opening of the Saudi Stock market to foreign

4 investors, foreign ownership of SABIC is limited to 49%, reflecting the desire of the KSA government to maintain national control over the company. Structural Considerations SABIC has part of its debt secured and/or located at the level of its operating subsidiaries and affiliates. Such levels of structurally senior or secured debt would normally warrant consideration of notching down the senior unsecured obligations at the parent company. However, we take the view that all SABIC's creditors ultimately benefit from the same level of credit enhancement derived from its KSA ownership and therefore do not notch the rating at this time. Liquidity SABIC demonstrates a strong liquidity profile, underpinned by a solid cash balance and a well distributed debt maturity profile. As of 30 June 2015, SABIC reported SAR68.1 billion (USD18.2 billion) in cash, including short term investments. Looking forward, even with the challenging market environment continuing into 2016, we would still expect SABIC to have the flexibility to pay debt obligations from internal cash should it choose to do so. Rating Outlook The rating outlook is stable reflecting a strong free cash flow profile and SABIC's ability to accommodate its 2025 growth strategy, bolt-on acquisitions, and high cash distributions, while maintaining strong credit metrics through the cycle. What Could Change the Rating - Up Considering the group's operating risk profile and capital structure, and the moderate distinction between the ratings of KSA and its strongly supported GRIs, we do not expect SABIC's ratings to be upgraded in the near to medium term. What Could Change the Rating - Down The rating could come under pressure if SABIC's BCA falls towards the middle of the `single-a' category as a result of a sustained markedly weaker operating performance and significantly higher investment spending (including large debt-funded acquisitions), leading to a more leveraged capital structure, with Net Debt to EBITDA in the area of 2.0x sustained through the cycle. A downgrade could also be the result of a reduction of our current assumption of strong government support. Rating Factors Saudi Basic Industries Corporation Chemical Industry Grid [1][2] Current LTM [3]Moody's Month Forward ViewAs 6/30/2015 of October 2015 Factor 1 : Scale (20%) Measure Score Measure Score a) Revenues (USD Billion) $44.9 A $43 - $45 A b) PP&E (net) (USD Billion) $46.6 Aaa $45 - $47 Aaa Factor 2 : Business Profile (20%) a) Business Profile Aaa Aaa Aaa Aaa Factor 3 : Profitability (10%) a) EBITDA Margin % 28.4% A 28% - 30% A b) ROA - EBIT / Average 9.9% Baa 9% - 10% Baa Assets Factor 4 : Leverage & Coverage (30%) a) Debt / EBITDA 2.0x Baa 1.8x - 2x A b) EBITDA / Interest Expense 19.2x A 17x - 19x A c) Retained Cash Flow / Debt 18.5% Ba 19% - 20% Ba

5 Factor 5 : Financial Policy (20%) a) Financial Policy Baa Baa Baa Baa Rating: a) Indicated Rating from Grid A2 A2 b) Actual Rating Assigned A1 A1 Government-Related Issuer Factor a) Baseline Credit a1 Assessment b) Government Local Aa3 Currency Rating c) Default Dependence High d) Support Strong e) Final Rating Outcome A1 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 6/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT

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