Fitch Ratings has affirmed
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
Limited Liquidity: As at
STAR Adds to Cost Savings:
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:
Derivation Summary
Petkim is a small commodity producer that is comparable to Turkiye-based
Other Fitch-rated, commodity-focused EMEA chemical companies include
Key Assumptions
Naphtha price follows the crude oil price of
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
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
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 '
Liquidity and Debt Structure
Limited Liquidity: Petkim's liquidity was weak at
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
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
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
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