According to the company’s website article published on October 10, 2022, Fitch Ratings has affirmed Petkim Petrokimya Holdings A.S.'s (Petkim) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B'. The Outlook remains Negative. Fitch has also affirmed the senior unsecured rating at 'B' with a Recovery Rating of 'RR4'.
The Negative Outlook reflects Petkim's liquidity constraints and expected deterioration in credit metrics due to shrinking petrochemical margins, weakening demand and rising costs. We forecast funds from operations (FFO) net leverage to rise above 4x over 2022-2024. The Negative Outlook also mirrors that on Turkiye (B/Negative) due to the company's sizeable exposure to the Turkish economy. All operating assets are located in Turkiye and around 50% of revenue is derived from the domestic market.
Petkim's rating takes into account its small scale, a single-site petrochemical complex and its exposure to cyclical commodity polymers, which results in inherent earnings volatility. Positively its business profile benefits from a well-invested asset base, a strong market position in the domestic petrochemical market and some resilience to foreign-exchange volatility.
KEY RATING DRIVERS
Margins Under Pressure: Petrochemical margins realised by Petkim fell by over a third in H122 from end-2021 and reported EBITDA margin declined to 10% in 1Q22 from 26% in 2Q21. We expect softening demand and rising energy prices to increase challenges for European petrochemicals producers in 2H22 and into 2023. We expect EBITDA margin to fall to around 9% in 2022 and to around 6% in 2023, partially due to weaker contribution from Petkim's trading activities. Economic recovery should restore EBITDA margin to around 11% in 2024-2025.
Rising Leverage: We forecast FFO net leverage to increase to materially above our negative rating sensitivity of 4.0x over 2022-2024, with a peak of above 8x in 2023 from 1.9x in 2021. The increase is driven by lower than previously forecast earnings, a higher debt load and higher working-capital (WC) volatility. Further, we no longer assume payment in 2022 of the last USD240 million instalment for Petkim's 18% stake purchase in STAR Refinery. We continue to include this liability in Fitch-adjusted debt calculation.
Limited Liquidity: As at end-June 2022 Petkim had TRY17.2 billion of short-term debt versus cash and deposits of TRY7.4 billion. The main component of current liabilities is a USD500 million (TRY8.5 billion) Eurobond due in January 2023, which due to current market conditions has not been refinanced to date. Petkim remains highly reliant on domestic banks to roll over its short-term debt and support from its ultimate majority parent State Oil Company of the Azerbaijan Republic (SOCAR, BB+/Stable) to secure sufficient funds for bond repayment cannot be ruled out.
STAR Adds to Cost Savings: STAR Refinery, which was launched in late 2018 by SOCAR next to Petkim's plants in Turkiye, now operates at its 11mt full capacity p.a. and supplies around 80%-90% of Petkim's naphtha feedstock. As a result, Petkim generates around USD30 million-USD40 million logistic cost savings annually. Exposure to a concentrated supply source is mitigated by the location of Petkim in close proximity to alternative supply sources from the Black Sea region and Russia.
Small-Scale Commodity Producer: Petkim is a Turkish commodity chemical producer, making plastics and intermediates from naphtha. Its small scale and single-site operations with limited integration are key factors driving the company's business profile. Petkim's profitability recovered in 2021 when naphtha-ethylene spreads continued to widen and supported an increase in petrochemicals prices. However, as the market rebalances on improved supply, we expect petrochemicals prices to fall to pre-pandemic levels in 2H22 and to weaken further in 2023.
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 prices. Simultaneously, the majority of sales is directly denominated in US dollar and euros, or indirectly driven by lira price indexation to global US dollar benchmarks. This supports Petkim's EBITDA during periods of lira devaluation, thus largely offsetting its inflated hard-currency debt. FX volatility could also have indirect implications by weakening domestic demand, although Petkim can choose to re-route its products to export markets.
Rating on Standalone Basis: SOCAR's IDR is equalised with that of Azerbaijan (BB+/Stable). Under Fitch's Parent and Subsidiary Linkage Rating methodology, we have not given an uplift to Petkim's rating from SOCAR's ownership. This is because we assess overall incentives to support as 'Low'.
DERIVATION SUMMARY
Petkim is a small commodity producer that is comparable to Turkiye-based Sasa Polyester Sanayi Anonim Sirketi (B/Negative). Petkim has lower leverage and higher margins but lower domestic market share and growth prospects. Sasa Polyester is a manufacturer of polyester stable fibres and yarns and in contrast to Petkim has an ambitious expansion programme, which entails execution risk.
Other Fitch-rated, commodity-focused EMEA chemical companies include Roehm Holding GmbH (B-/Stable) and Ineos Group Holdings S.A. (BB+/Stable). Roehm has a leading position in the methacrylates business in Europe with better geographical diversification, but is more leveraged than Petkim. Ineos has a much stronger business profile with better product and geographical diversification and a larger scale. The US-based Westlake Corporation (BBB/Positive) have competitively priced petrochemical feedstock, placing it in a more advantageous position than less-integrated producers, such as Petkim.
KEY ASSUMPTIONS
-Naphtha price follows the crude oil price of USD100/bbl in 2022, USD85/bbl in 2023, USD65/bbl in 2024 and USD53/bbl in 2025
-Year-end USD/TRY rates of 20 in 2022, 24.9 in 2023, 27.7 in 2024-2025
-Working-capital inflow of around TRY0.3 billion in 2022, followed by net working-capital outflow of TRY1 billion in 2023-2025
-Capex at around 6% of sales in 2023 and 5% in 2024-2025 and 8% in 2026
-No dividends paid to Petkim's shareholders nor received from STAR Refinery in 2022-2025
Recovery Analysis Assumptions
The recovery analysis assumes that Petkim would be considered a going-concern (GC) in bankruptcy and that the company would be reorganised rather than liquidated.
GC EBITDA is estimated at USD220 million. It reflects Petkim's moderate recovery from a downcycle with benefits from synergies with the STAR Refinery.
An enterprise value (EV) multiple of 4x was applied to the GC EBITDA, reflecting Petkim's single-site business with exposure to emerging markets and a volatile commodity sector.
After deducting 10% for administrative claims and taking into account Fitch's Country-Specific Treatment of Recovery Ratings Rating Criteria, our waterfall analysis generated a waterfall-generated recovery computation (WGRC) in the 'RR4' band, indicating a 'B' instrument rating. The WGRC output percentage on current metrics and assumptions is 50%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- As the rating is on Negative Outlook, a positive rating action is unlikely at least in the short term. We would revise the Outlook to Stable if the company successfully carries out its refinancing and its liquidity profile improves, reduces its FFO net leverage to below 4.0x and net debt to EBITDA below 3.5x and Turkiye's sovereign rating Outlook is revised to Stable
- Consistent implementation of conservative financial policy leading to FFO net leverage consistently below 3.0x and net debt/EBITDA sustainably below 2.5x coupled with an upward revision of Turkiye's Country Ceiling would lead to a positive rating action
-EBITDA interest cover sustainably above 4.0x
- Sound liquidity on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downward revision of Turkiye's Country Ceiling
-Inability to refinance upcoming maturities or deteriorating liquidity profile
- Aggressive financial policies and/or a prolonged downturn in petrochemical market leading to sustained erosion in margins, FFO net leverage sustainably above 4.0x and net debt to EBITDA sustainably above 3.5x
-EBITDA interest cover sustainably below 2.5x
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Limited Liquidity: Petkim's liquidity was weak at end-June 2022, with cash and deposits of TRY7.4 billion versus short-term debt of TRY17.2 billion. Current debt consists primarily of USD500 million (TRY8.5 billion) bond due in January 2023 and TRY6.6 billion of liabilities resulting from letters of credit and murabaha loan for naphta procurement that we treat as debt.
Due to volatile market conditions and heightened risk of bond refinancing, we expect Petkim to raise additional funds from the local banks, potentially with support from SOCAR by end-2022. Following bond repayment we expect Petkim to increase its reliance on short-term funding from domestic banks. While this is not uncommon among Turkish corporates it exposes the company to systemic liquidity risk.
ISSUER PROFILE
Petkim is a small Turkish petrochemical producer with 3.6 million tonnes annual gross production capacity including commodity chemicals. It operates 15 main and six auxiliary processing units, all located in Turkiye.
SUMMARY OF FINANCIAL ADJUSTMENTS
In 2021 we treated TRY71 million (TRY38.4 million of depreciation and amortisation on rights-of-use of assets, and TRY33 million of lease interests) as operating expenses.
In 2021 TRY3.1 billion (equivalent USD240 million) residual commitment to pay for the 18% stake in STAR Refinery was treated as off-balance-sheet debt.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
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 the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
- Country-Specific Treatment of Recovery Ratings Criteria (pub. 06 Jan 2021)
- Corporates Recovery Ratings and Instrument Ratings Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity)
- Corporate Rating Criteria (pub. 16 Oct 2021) (including rating assumption sensitivity)
- Parent and Subsidiary Linkage Rating Criteria (pub. 01 Dec 2021)
- Sector Navigators: Addendum to the Corporate Rating Criteria (pub. 16 Jul 2022)
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.0.3 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
Petkim Petrokimya Holdings A.S.
EU Issued, UK Endorsed
DISCLAIMER & DISCLOSURES
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SOLICITATION STATUS
The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below.
ENDORSEMENT POLICY
Fitch’s international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch’s approach to endorsement in the EU and the UK can be found on Fitch’s Regulatory Affairs page on Fitch’s website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.
