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Published on December 28, 2007

At the same time, Moody's has upgraded to Baa2 from Baa3 the US$300-million (Bt10.1 billion) senior unsecured bonds previously issued by Aromatics, and which have now been transferred to PTTAR. The outlook on the ratings is stable.

"The rating upgrade recognises that the merger of Aromatics and Rayong Refinery has created a company with a stronger credit profile," says Moody senior vice president Tony Tsai. "PTTAR's business profile is further supported by its enhanced vertical integration, achieved through its ownership of a substantial and efficient oil refinery."

The merger also provides PTTAR with better product and earnings diversity, particularly given the strength of the refining sector overall. Such diversity should lessen the volatility that had characterised Aromatics' standalone earnings in recent years, he says.

Furthermore, the merger leads to a stronger financial profile for PTTAR with debt to Ebitda (earnings before interest, tax, depreciation and amortisation) of around 1.5 times and Ebitda/interest of 9-11 times over the next two years, better than those of Aromatics, and reflecting Rayong Refinery's strong balance sheet, said Tsai.

PTTAR's Baa2 rating also factors in the support from its major shareholder, PTT (rated A2/Stable) in view of its 49-per-cent ownership as well as the resultant close cooperation and business integration.

The ratings outlook is stable, reflecting Moody's expectation that industry conditions will not experience substantial deterioration over the next 12-18 months. Furthermore, PTTAR's strong credit metrics provide ample headroom for an unexpected industry downturn, if any.

Upward rating movement would evolve if PTTAR demonstrates: successful implementation of its Aromatics II project as planned, consistent generation of free cash flow and improvements in its financial profile, such that retained cash flow/adjusted debt surpasses 35 per cent; and adjusted debt/Ebitda falls below 1.5 times on a sustainable basis. A further strengthening of its business relationship with PTT and evidence of financial/business support from PTT would also be positive for the rating.

On the other hand, the rating would experience downward pressure if PTTAR's financial profile deteriorated, such that retained cash flow/adjusted debt drops below 20 per cent and debt/Ebitda exceeds 2.5 times on a consistent basis. This outcome could be a result of: a material downturn in the petrochemicals and refining industry, or the company undertakes further aggressive debt-funded cap-expenditure plans.

Furthermore, a significant reduction in PTT's ownership of PTTAR and/or a material change to the supply and off-take agreements between the two companies would be negative for the rating.

PTTAR is an integrated petrochemicals and refining company. It owns a refinery complex in Rayong province with a production capacity of 215,000 barrels per day. It is also involved in the production of aromatics products, including benzene, paraxylene, orthoxylene and mixed xylenes, with an overall production capacity of 1.19 million tonnes per annum.

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