Fitch Affirms Petkim at 'B'; Outlook Stable

Petkim Petrokimya Holding

17/12/2019 15:30

(The following statement was released by the rating agency)


Fitch Ratings-Moscow-December 17: 

Fitch Ratings has affirmed Petkim Petrokimya Holdings A.S.'s (Petkim) Long-Term 
Issuer Default Rating (IDR) at 'B' with a Stable Outlook. The full list of 
rating actions is detailed below.

The affirmation reflects our view that Petkim's funds from operations (FFO) 
adjusted net leverage would remain within our 4x negative rating sensitivity 
during 2019-2020 despite significant supply-driven pressure across the company's 
major markets. The impact of the resulting margin squeeze on leverage is partly 
offset by delayed cash outflows to shareholders including no cash dividends in 
2019 and the deferral to beyond end-2019 of the residual USD240 million cash 
consideration payable to a parent company for the STAR refinery 18% stake.

The rating of Petkim reflects its high leverage, small scale and high product 
concentration relative to larger, diversified global peers. In particular, 
Petkim owns a single-site petrochemical complex and is exposed to cyclical 
commodity polymers, which results in inherent earnings volatility. Its business 
profile benefits from a well-invested asset base and relative resilience to 
foreign exchange volatility.

Key Rating Drivers

Thermoplastics Recovery Unlikely Before 2021: Thermoplastic markets remain under 
pressure as significant capacities, including those from the US with cheap gas, 
arrived both in 2018 and 2019. We expect that the pace of new capacity arrivals 
will moderate from 2020. However, we believe it will take time for growing 
demand to digest new supply, with market pressure extending into 2020 and 
recovery starting from 2021. Over the long-term we believe that global plastics 
demand will remain slightly above global GDP growth, although in certain markets 
growth might be impacted by rising environmental concerns, including those 
around single-use plastics.

Spreads Turnaround Delayed to 2020: The earnings of Petkim reflect the spread of 
its products to naphtha, its major feedstock. We now expect that spread pressure 
will bottom out in 2020, instead of 2019 as envisaged earlier, for 
thermoplastics representing nearly half of Petkim's non-trading revenues. The 
pressure partly comes from oversupply in polyethylene (PE, 60%-65% of Petkim's 
plastics sales) where spreads to naphtha will remain low in 2020 due to another 
3 million tonnes of US ethylene capacities being added in 2019. While 
supply-driven price pressure is not uniform across markets, we see this as a key 
driver for earnings to bottom out in 2020 and to gradually recover from 2021.

Turkish Lira Impact Manageable: Petkim has almost 90% of its plant production 
costs, or 80%-85% of total cash costs, denominated in US dollars as its major 
feedstock, naphtha, is purchased at US dollar price. Simultaneously, the 
majority of sales is directly denominated in US dollar and euros, or indirectly 
driven by lira price indexation to the global US dollar benchmarks. This 
supports Petkim's EBITDA during the periods of lira devaluation, thus largely 
offsetting the company's hard-currency debt revaluation. FX volatility could 
also have indirect implications such as weaker domestic demand, although Petkim 
can choose to re-route its products to export markets.

STAR Launch Adds to Earnings: In late 2018 Petkim's ultimate corporate parent, 
State Oil Company of the Azerbaijan Republic (SOCAR, BB+/Stable), launched a new 
STAR refinery located next to Petkim's plants in Turkey with annual oil refinery 
capacity of 10mt. As a result, Petkim expects to have around USD40million annual 
savings on logistic costs from mid-2019 as STAR ramped up. The refinery supplies 
up to 1.6 million tonnes (mt) of naphtha and 270 thousand tonnes of mixed xylene 
and/or reformate feedstock to Petkim annually.

STAR Stake Purchase Smoothed: We expect that Petkim will be able to adjust the 
timing of the last of three equal USD240 million instalments for its 18% stake 
in STAR in case of need, thus minimising its impact on cash flows in 2019-2020 
as market pressure persists. The first two instalments were paid in 2018, funded 
by a USD500 million bond placement. We conservatively add the outstanding USD240 
million payment to Petkim's adjusted debt.

Leverage Peak in 2020: FFO-adjusted net leverage trend will follow Petkim's 
earnings and peak in 2020 at around 4x before declining towards 3x in 2021-2022 
as markets recover. The factors preventing Petkim from higher 2019 and 2020 
leverage include prudent capex and zero cash dividends for 2019 and 2020. Petkim 
demonstrated its ability to suspend cash dividend payments, if required, in 2019 
and we believe this will continue in 2020 as its operating cash flows generation 
will remain subdued. 

Small Scale Commodity Player: Petkim is a Turkish commodity chemical producer, 
making plastics and intermediates from naphtha. Petkim has benefited from a 
widened naphtha-ethylene spread since 2014 when oil prices were rebased. 
However, we forecast that the increase in global ethylene and polymer 
production, mainly in the US and Middle East on the back of cheap gas, will put 
pressure on petrochemical margins for unintegrated players, including Petkim, in 
2019 and partly in 2020. Petkim's small scale and single-site operations are key 
factors driving the company's business profile in the 'B' category.

Contingent Liabilities of STEAS: Petkim is 51%-owned by STEAS, which in turn is 
87%-owned by SOCAR and 13% by Goldman Sachs. Petlim, a container terminal in the 
Aegean Region operating since 4Q16, is 70%-owned by Petkim and 30%-owned by 
Goldman Sachs. Goldman Sachs has put options with STEAS and SIL (subsidiary of 
SOCAR) until 2021 protecting the value of its stakes in STEAS and Petlim. Should 
these options be exercised, STEAS would incur liabilities of up to USD1 billion 
in respect of STEAS, and USD300 million in respect of Petlim, with the remaining 
of USD300 million to be paid by SIL. While this is not our base case scenario, 
this could result in pressure on Petkim to upstream additional cash to STEAS. 

Rating on Standalone Basis: SOCAR's IDR is aligned with that of Azerbaijan 
(BB+/Stable) while its standalone credit profile corresponds to 'b+'. Under 
Fitch's Parent and Subsidiary Rating Linkage methodology, we have not factored 
in any uplift on Petkim's rating from SOCAR's ownership since we do not view 
support from the Azerbaijan government as the most likely scenario and we assess 
the overall links between SOCAR and Petkim as moderate. This assessment captures 
moderate legal ties between the two companies (which takes into account lack of 
legal guarantees but also assumes Petkim being subject to cross-default 
provision in SOCAR's bond documentation), moderate strategic and strong 
operational ties. 

Derivation Summary

Russia-based PJSC Kazanorgsintez (B+/Stable) is Petkim's closest rated peer 
based on product mix (basic polymers) and geographical concentration. 
Kazanorgsintez benefits from its more competitive cost position, higher EBITDA 
margins (on average over 25%) and from a stronger financial profile with FFO 
adjusted net leverage of under 1x. Petkim, in turn, benefits from wider product 
diversification while Kazanorgsintez's revenues are more concentrated towards 
polyethylene.

Other Fitch-rated, commodity-focused EMEA chemical companies include AI PLEX 
AcquiCo GmbH (B(EXP)/Stable), PAO SIBUR Holding (BBB-/Stable), Ineos Group 
Holdings S.A. (BB+/Stable). AI PLEX benefits from a leading position in the 
methacrylates business in Europe with better geographical diversification but is 
more leveraged than Petkim. Ineos' business profile is in the 'bbb' category 
with better product and geographical diversification and larger scale. SIBUR as 
well as US-based Westlake Chemical Corporation (BBB/Stable) and NOVA Chemicals 
Corporation (BB+/Negative) benefit from competitively-priced petrochemical 
feedstock, placing them in a more advantageous position versus less integrated 
players such as Petkim.

Key Assumptions

- Naphtha price following the crude oil price of USD62.5/bbl in 2020, USD60/bbl 
in 2021, and USD57.5/bbl thereafter

- USD/TRY at 6.3 in 2020, and 6.9 in 2021

- Thermoplastics margins pressuring EBITDA towards USD220 million in 2020 
(TRY1.4 billion) before a market-driven recovery towards USD240 million - USD250 
million (TRY1.7 billion) from 2021

- Trading operations to increase, partly diluting forecast EBITDA margin for 
2020-2022

- Low double-digit EBITDA margin over 2019-2022

- Capex-to-sales at around 4% over 2019-2022

- Cash dividends pay-out suspended in 2019 and 2020, before resuming from 2021

- The last USD240 million instalment related to the 18% stake purchase in the 
STAR Refinery to be paid in 2020-2021

The recovery analysis assumes that Petkim would be considered a going-concern in 
bankruptcy and that the company would be reorganised rather than liquidated. We 
have assumed a 10% administrative claim.

The going-concern EBITDA is 2020 forecast EBITDA, which better reflects the 
operational profile of Petkim going forward (with benefits from synergies with 
the STAR Refinery), discounted by 10%. An enterprise value (EV) distressed 
multiple of 4x is applied.

The payment waterfall corresponds to a 'RR3' recovery for the senior unsecured 
rating. However, in line with our methodology, we apply a soft cap of 'RR4' to 
reflect Petkim's asset location in Turkey.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

- FFO adjusted net leverage consistently below 3.0x (2018: 3.5x); and

- Significant improvement in cash flow diversification, e.g. higher cash flow 
generation at Petlim and dividends from the STAR refinery.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- FFO net adjusted leverage sustained above 4.0x; 

- Support provided to the parent resulting in higher leverage (e.g. cash 
outflows related to put options being called by Petlim and STEAS's minority 
shareholder); and

- Material deterioration in the outlook for petrochemical margins.

Liquidity and Debt Structure

Limited Liquidity: Petkim's liquidity was strained at end-September 2019, with 
cash and deposits of TRY3.4 billion slightly below short-term debt of TRY3.5 
billion. Current debt is mostly used to finance working capital, including 
TRY1.1 billion of liabilities resulting from letters of credit for naphtha 
procurement that we treat as debt. Petkim's debt maturity profile reflects some 
reliance on domestic banks. This is not uncommon among Turkish corporates but 
exposes the company to systemic liquidity risk and results in a liquidity ratio 
being close to 1x. The rest of total debt has remote maturity dates, including 
mainly a USD500 million bond due in 2023.

Summary of Financial Adjustments

- TRY16 million operating lease expenses were capitalised and added to debt with 
5x multiple as the issuer operates in Turkey

- TRY1,263 million (USD240 million-equivalent) residual commitment to pay for 
the 18% stake in STAR refinery treated as off-balance sheet debt

- TRY1,523 million of letters of credit arising from naphtha purchases treated 
as debt

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3. This means ESG issues are credit-neutral or have only 
a minimal credit impact on the entity, either due to their nature or to the way 
in which they are being managed by the entity.

For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg

Petkim Petrokimya Holdings A.S.; Long Term Issuer Default Rating; Affirmed; B; 
RO:Sta

----senior unsecured; Long Term Rating; Affirmed; B

Contacts: 

Primary Rating Analyst

Dmitri Kazakov, CFA

Director

+7 495 956 7075

Fitch Ratings CIS Ltd

Business Centre Light House, 6th Floor 26 Valovaya St.

Moscow 115054

Secondary Rating Analyst

Laurent Vergnault, 

Senior Analyst

+44 20 3530 1842

Committee Chairperson

Dmitry Marinchenko, CFA, ACCA

Senior Director

+44 20 3530 1056

 

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
adrian.simpson@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)

https://www.fitchratings.com/site/re/10090792

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019)

https://www.fitchratings.com/site/re/10089196

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

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https://www.fitchratings.com/site/dodd-frank-disclosure/10105532

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https://www.fitchratings.com/site/pr/10105532#solicitation

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https://www.fitchratings.com/regulatory

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