Credit ratings agency Fitch has affirmed Saudi Basic Industries Corporation’s (Sabic) standing with an A+ rating, and deemed its outlook stable.
Fitch Ratings has affirmed Saudi Basic Industries Corporation’s (Sabic) long-term issuer default rating (IDR) and senior unsecured rating at ‘A+’ and short-term IDR at ‘F1’. The outlook on the Long-Term IDR is Stable. The senior unsecured rating on Sabic Capital’s guaranteed bonds has also been affirmed at ‘A+’.
The ratings reflect Sabic’s (profile) vertically integrated operations, state of the art world-scale production facilities and access to competitively priced natural gas feedstock (methane and ethane) in Saudi Arabia.
Competitive access to feedstock results in strong free cash flow and best-in-class EBITDA margins, especially in Saudi Arabia, which compensates for other under-performing regions. This mitigates the inherent cyclicality in Sabic’s markets (petrochemicals, agri-nutrients, metals) and has limited the cash flow impact of the group’s large expansion projects and occasional associated cost overrun or delays in the past.
KEY RATING DRIVERS
Robust Margins Despite Challenges: The Saudi government increased feed stock prices for Sabic from 2016. Management actions including cost efficiency programs helped Sabic improve its profitability despite a more challenging operating environment as a result of low chemical prices. The EBITDA margin in 2016 was 35% compared with 31% in 2015. We conservatively assume margins to be in line with the average for 2013-2015 in our forecasts and expect credit metrics will remain within guidance for the rating.
2017 Feedstock Prices Unchanged: The government announced in 2016 plans to phase out subsidies to consumers and companies, but importantly feedstock prices for Sabic remained unchanged in 2017. Due to the uncertain timing and size of potential upward price revisions, we currently assume that feedstock prices will remain unchanged. Our analysis shows that a further increase in key feed stock prices in 2018 and 2019 should still allow Sabic to maintain healthy credit ratios. We will assess the impact of any further price increases on Sabic’s ratings in conjunction with the resulting forecast credit metrics and EBITDA profitability.
Headroom to Increase Leverage: Sabic decreased gross debt by SAR 10.3 billion at end-2016 yoy to SAR 62.3 billion despite the challenging external environment. Coupled with strong profitability, this reduced funds from operations (FFO) net adjusted leverage to 0.4x, significantly lower than that of any of Sabic’s peers. We expect that low leverage and management’s intention to maintain a strong financial profile should help Sabic navigate an expected increase in capex spending and potential feed stock price revisions.
Continued Capex, Inorganic Expansion: Sabic plans to increase annual capex, largely driven by a potential multi-billion oil to chemicals project, on which a decision is expected in 2017. Other key development projects include a 400,000 tonne per year elastomer production site, a potential steel plant and a methyl- and polymethyl methacrylate site in Saudi Arabia. There also remains the possibility for Sabic to acquire other businesses and carry out joint ventures. The company recently acquired a 50 per cent stake in its joint venture with Royal Dutch Shell (AA-/Negative) and is considering a JV with Exxon on the US gulf coast.
Overall there is sufficient headroom within metrics for these projects, with FFO net leverage remaining below 1.5x despite the resurgence of expansionary capex.
Group Structure Shortcomings Mitigated: A large portion of consolidated earnings is generated by partly owned operating companies. In Fitch’s view, the associated risks (structural subordination, restricted access to cash flow or reliance on dividend payments) are mitigated by Sabic’s management control of the entities, the stable stream of dividends and fees historically received by the holding company, a high level of operational integration across the group, and large cash balances maintained at the holding company. Fitch’s FFO based leverage and coverage ratios exclude dividends paid to minorities to account for cash leakage to minority shareholders.
KEY ASSUMPTIONS
Fitch’s key assumptions within our rating case for the issuer include:
– Revenues move in line with oil prices from 2017 (USD 45/bbl in 2017, USD 55/bbl in 2018, USD 60/bbl in 2019)
– We conservatively assume EBITDA margins to decrease from 35 per cent in 2016 to 31 per cent in 2017-2019, in line with the average for 2013-2016
– Capex and dividends received as per management forecasts for 2017-2018
RATING SENSITIVITIES
Negative: Future developments that may individually or collectively lead to negative rating action include:
– FFO-adjusted net leverage sustained at above 1.5x through the cycle due to aggressive debt-funded expansion.
– Material adverse revisions in the group’s feedstock supply arrangements, significant changes in Sabic’s shareholding structure or any material impairment in the control of its affiliates/joint-ventures and resulting ability to access/upstream cash.
– EBITDA profitability below 25% on a sustained basis.
– A downgrade of KSA to below ‘A+’.
There is little scope within Sabic’s current business profile for it to be rated above ‘A+’, which we generally consider the highest rating attainable for companies in the chemical sector due to the inherent cyclicality of the industry.
LIQUIDITY
Given its structure, Fitch expects Sabic to maintain larger cash balances and lower net leverage ratios than peers with the same rating. Liquidity is forecast to remain strong. At end-2016, cash balances and short-term investments were SAR 41.1 billion and SAR 20.1 billion, respectively. This compared well with maturing long-term debt of SAR 13.3 billion.
FULL LIST OF RATING ACTIONS
Sabic:
Long-Term IDR: affirmed at ‘A+; Outlook Stable
Short-Term IDR: affirmed at ‘F1’
Senior unsecured rating: affirmed at ‘A+’
Sabic Capital I B.V.:
Senior unsecured rating: affirmed at ‘A+’
Sabic Capital II B.V.:
Senior unsecured rating: affirmed at ‘A+’