Taiwan Ratings Corp (中華信用評等), a local arm of Standard & Poor’s, on Wednesday cut its long-term rating for Formosa Plastics Group (台塑集團) to “twAA-” from “twAA” on weakened cash flow metrics. This marked the first time in nearly 50 years that the group saw its ratings downgraded, the Chinese-language Economic Daily News reported yesterday.
Taiwan Ratings said in a press release its decision to downgrade the nation’s largest industrial conglomerate was based on the fact that “the Formosa Plastics Group’s profitability and cash flow generation have weakened [and] the group is unlikely to restore its credit metrics in the next two years.”
Despite this, “the outlooks on the ratings are stable,” it said.
In response, Formosa Plastics Group said it regretted that Taiwan Ratings had decided to downgrade its ratings, but would respect the ratings results, the paper said, citing an unidentified Formosa executive.
Although the group’s earnings declined significantly in the fourth quarter of last year because of the sudden drop in crude oil prices and the global financial crisis, earnings began to improve sharply in the first quarter of this year, the executive said.
Furthermore, two of the four core companies of the group — Formosa Plastics Corp (台塑) and Formosa Petrochemical Corp (台塑石化) — had returned to profitability in the first quarter. The speed of recovery in the group’s earnings is among the best in the world’s petrochemical sector, the executive said, adding that the group expects all of its four companies to report profits in the second quarter.
Many businesses are not immune to downgrades since the global financial crisis intensified last year, the executive said, adding that even Dow Chemical Company, the No. 3 petrochemical company in the world, was downgraded, and the Formosa group was not the only one.
The executive said that long-term investors had always favored the Formosa group’s stable operations and earnings. Hence, the ratings downgrade would not have a huge impact on the group’s ability to raise capital.
The interest rate on the corporate bonds the group last issued this year was 1.85 percent, much lower than other local companies. This shows that, despite the financial crisis, many institutional investors are still upbeat about the group’s long-term profitability, the paper said.
The executive said although the group’s financial condition was healthy, it may still need to raise more low-cost capital.
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