SINGAPORE (Indonesia Today) – Moody’s Investors Service says Chandra Asri Petrochemical Tbk’s (B2 negative) buyback of its outstanding USD184.9 million senior secured guaranteed notes, if successful, will be credit positive.
The tender offer for the notes will close on 3 October. In conjunction with the offer, Chandra Asri Petrochemical (CAP) solicited the consent for certain amendments to the terms of the bonds, including the ability to incur additional secured debt, the release of security, and the ability to redeem notes that remain outstanding after the tender offer.
“The redemption of the notes and the consent solicitation, if successful, will significantly lower the company’s interest expense, which will increase the headroom under the maintenance covenants in its USD150 million bank loan,” says Vikas Halan, a Moody’s Vice President and Senior Analyst.
“As a result, the company will have more financial flexibility to take on additional debt to fund its working capital needs and execute its strategic expansion,” he adds.
Given the weak operating environment and low naphtha-ethylene spreads, CAP has no headroom under its debt incurrence test to assume further debt that is required to supplement the expected weak cash flow over the next year. For the 12 months ended June, the company generated EBITDA of only USD22 million, which is just about 1% of its revenue.
CAP plans to fund the buyback with new bank loans and has entered into binding commitments with two Thai banks for term-loan facilities of up to USD220 million, with a term of 7 years (subject to the execution of final documentation and meeting of all conditions).
The interest rates on these new facilities are likely to be significantly lower than the current rate of 15.5% for the notes (12.875% coupon plus 20%, withholding tax thereon). CAP cannot draw down on these facilities unless the consent solicitation is successful.
The company is also seeking solicitation to amend certain terms in its existing US$150m term-loan facility, amongst others to reduce interest costs and to relax the financial covenants, which will result in lower finance costs and increase financial flexibility of CAP.
Under the USD150 million term-loan facility, the company is required to maintain the ratio of its reported operating cash flows to finance costs at above 2x, at the end of every quarter, on a rolling 12-month basis. As at 30 June, this ratio was at 2.4x.
The full retirement of the currently outstanding notes will also increase CAP’s financial flexibility as it will no longer be subject to debt incurrence tests, as required by the bond indenture. The consent solicitation is also seeking agreement to allow the company to incur new facilities to fund the bond buyback as well as other working capital and capital expenditure needs.
“We view CAP’s initiative to strengthen its capital structure as timely. In the current challenging operating environment, characterized by high naphtha prices and low naphtha-ethylene spreads, finance cost savings and increased financial flexibility will help the company better address its near-term working capital and other funding needs,” says Halan, who is also the Lead Analyst for CAP.
CAP’s B2 rating reflects its leading position in the Indonesian petrochemicals market, resulting from its competitive and vertically integrated operations. The rating also reflects the company’s high leverage, small global presence, asset concentration, and the inherent cyclical nature of the petrochemical industry, all of which have led to volatile earnings and cash flow.
The negative outlook reflects a protracted decline in the company’s profit margins following a decline in its naphtha-ethylene spread, which has weakened its credit metrics as a result. Such pressure on its profit margins and weak credit metrics is likely to affect the company for the next 12 months. The negative outlook also takes into account the declining headroom under the maintenance covenants in the company’s USD150 million bank loan, which will somewhat improve following a successful completion of the proposed transaction.
CAP, listed on the Jakarta Stock Exchange, operates an integrated petrochemical complex, including the only naphtha cracker in Indonesia with a cracking capacity of 1.7 million tons per annum (tpa).
The complex has a production capacity of 600,000 tpa for ethylene, 320,000 tpa for propylene, 280,000 tpa for py-gas, 220,000 tpa for crude C4, two polyethylene plants with a combined production capacity of 336,000 tpa, and 480,000 tpa for polypropylene. Through its wholly owned subsidiary, Styrindo Mono Indonesia, CAP also has an annual styrene monomer production capacity of 340,000 tpa. (Indonesia Today)