Moody’s upgrades Chandra Asri to Ba3; outlook stable

Photo by Barito Pacific

Singapore, August 03, 2017 — Moody’s Investors Service has upgraded the
corporate family rating (CFR) of Chandra Asri Petrochemical Tbk (P.T.) to
Ba3 from B1. The outlook on the ratings is stable.


“The upgrade of Chandra Asri’s CFR to Ba3 reflects the large and
sustainable improvement in its margins, cash flow generation, financial
leverage and liquidity profile since the completion of its cracker
expansion project in late 2015,” says Brian Grieser, a Moody’s Vice
President and Senior Credit Officer.

The cracker expansion project added significant ethylene and propylene
capacity in 2016. Moody’s expects the improved operating leverage from
this capacity and other ongoing projects to result in more resilient
margins and cash flow generation during downturns in the petrochemical

Moody’s says that product spreads should tighten over the next two years,
given the likely growth in global petrochemical capacity. Nevertheless,
the spread between Chandra Asri’s key olefin and polyolefin products and
its naphtha feedstock should remain at levels such that the company can
maintain EBITDA margins of around 20% over the next 12-24 months, down
from 28% for the 12-month period ended 31 March 2017.

“The Ba3 rating reflects the improvement in Chandra Asri’s balance sheet,
particularly its increased cash balances and lower debt levels, which
when combined with substantially improved EBITDA generation, have lowered leverage to below 1.0x,” added Grieser.

Chandra Asri has announced several large capital expenditure projects —
including a butadiene plant expansion, a polypropylene plant
debottlenecking, a naphtha cracker furnace revamp, a new polyethelene
plant, a new MTBE and Butene-1 plant and a feasibility study into
constructing a second naphtha cracker — which could result in capital
spending of roughly $1 billion over the next three years.

A second naphtha cracker would aim to add 1,000,000 tons of ethylene
capacity and various downstream derivatives products. While still in the
planning stages, this plan could cost between $4 and $5 billion and add
significant execution risk over the next five years. The key terms and
ownership structure of this potential project have yet to be determined.

Moody’s expects any financial investment decision made on this project by
Chandra Asri to be prudently financed and include strong joint venture
partners to reduce its exposure.

Moody’s also expects that Chandra Asri will maintain a strong liquidity
profile and conservative financial policies, despite its heavy capital
spending plans.

The company’s cash balance of $278 million at 31 March 2017, the proceeds
from its recently announced rights offering and cash flow from operations
should fully fund its capital spending plans and dividends over the next
three years.

The stable rating outlook reflects Moody’s expectation that Chandra
Asri’s operating performance and cash flow generation will stay strong
over the next 12-18 months. Capital spending will likely ramp up over
the next two years, as the company executes its expansion projects, which
will be largely funded by cash and cash flow from operations.

The company’s rating could be upgraded if its planned capacity expansion
is executed on time and within budget, and free cash flow generation
remains positive through the cycle. Chandra Asri will have to maintain a
debt/EBITDA below 2.0x, with EBITDA margins of around 25%-30% on an
ongoing basis for Moody’s to consider upgrading its rating, given the
inherent cyclicality of the petrochemical industry.

The company’s rating could be downgraded, if: (1) its credit metrics
deteriorate such that leverage is likely to be maintained at 3.0x over an
extended period; or (2) its liquidity deteriorates, such that its cash
balance falls below $100 million; or (3) the company initiates large
incremental debt-funded expansion projects.

Chandra Asri Petrochemical Tbk (P.T.) is an integrated petrochemical
company operating the only naphtha cracker in Indonesia. The company has
a production capacity of 860 thousand tonnes per annum (ktpa) for
ethylene, 470 ktpa for propylene, 400 ktpa for py-gas, 315 ktpa for
mixed C4, 336 ktpa, and 480 ktpa for polypropylene. Chandra Asri also has
an annual styrene monomer production capacity of 340 ktpa and the
capacity to produce 100 ktpa of butadiene.

CAP was established in January 2011 through the merger of PT Chandra Asri
and PT Tri Polyta Indonesia Tbk. CAP is owned by PT Barito Pacific Tbk
(65.2%), the Siam Cement Group, through its subsidiary, SCG Chemicals
Co., Ltd. (one of the largest integrated petrochemical companies in
Thailand) (30.57%) and the remaining shares are held by public investors
(4.22%). CAP is listed on the Jakarta Stock Exchange.