RIYADH – Fitch Ratings has affirmed Saudi Basic Industries Corporation's (Sabic) Long-term Issuer Default Rating (IDR) at ‘A+', 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 I B.V.'s guaranteed bonds has also been affirmed at ‘A+'. The affirmation encompasses a re-examination of the one-notch uplift previously incorporated in SABIC's ‘A+' rating for assumed support from its controlling shareholder, the Kingdom of Saudi Arabia (KSA, ‘AA-'/Stable). In Fitch's revised view, the ‘A+' IDR reflects Sabic's standalone business and financial profile which already embed any benefits from its state-ownership. ‘A+' is the highest rating in the sector and Fitch regards it as a ceiling for the industry due to its inherent cyclicality. The ratings reflect Sabic's vertically integrated operations, state-of-the-art world-scale production facilities and access to competitively priced natural gas feedstock in the Kingdom. The latter translates into best-in-class profitability levels and robust pre-capex cash flow generation through the cycle. This in turn mitigates the inherent cyclicality in Sabic's markets (petrochemicals, fertilizers, metals) and has limited the cash flow impact of the group's large expansion projects and associated cost overrun or delays. The ratings also reflect the progress to date on Sabic's expansion program, with reduced execution risk and increasing contributions to cash flow generation from debt-funded projects. Under Fitch's base case, and in contrast with historical trends, Sabic generates positive free cash flow (FCF) over the rating horizon, despite sustained high levels of investments. New projects include a 400ktpa elastomer production site in KSA through Kemya, the 50/50 joint venture (JV) with ExxonMobil Corporation, and a 260ktpa polycarbonate plant in China through SSTPC, the 50/50 JV with China Petroleum and Chemical Corporation (Sinopec, ‘A'/Stable). The projects have a total cost of around SR18 billion and are both to be completed by 2015. The resurgence of expansion capex, albeit at lower levels than in 2007-2011, translates in funds from operations (FFO) adjusted gross leverage of 1.8x in 2012 under Fitch's forecasts, with gradual deleveraging aftewards. The ratings also factor in the group's structure, with a large portion of consolidated earnings generated by partly-owned operating companies. In Fitch view, the associated risks (structural subordination, restricted access to cash flow or reliance on dividend payments) are mitigated by Sabic's management control over these entities, the stable stream of dividends and fees historically received by the holding company, the high level of operational integration across the group, and large cash balances maintained at the holding company. Liquidity is expected to remain robust, with projected net FFO leverage below 1.0x under the base case. Given its structure, Fitch would expect Sabic to maintain larger cash balances and lower net leverage ratios through the cycle than peers at the same rating level. Liquidity was strong at end-Q112 with cash positions of SR59 billion. This compared with maturing debt of SR13 billion. Sabic also counted on unused committed lines of around SR11.3 billion and short-term deposits (between three months and one year) of SR18 billion. Fitch's base rating case conservatively forecasts low single digit growth in 2012, reflecting ramping up capacity (Saudi Kayan), and a softer demand and pricing environment. The agency assumes that EBITDA margin will contract to around 31 percent. A mild recovery is assumed in 2013-2014. Key risks to Fitch's forecasts are a return to recessionary market conditions, with slower growth in Asia, lower demand for petrochemical products against the backdrop of large capacity additions in the GCC region and China, and resulting pricing pressure and margin erosion. In the medium term, the ethane price of $0.75/mmbtu currently enjoyed by Saudi petrochemical producers could increase, thus eroding their profitability. However, a price hike is unlikely to pose a threat to their competitiveness on the international markets. – SG
