Taiwan Ratings Corp (中華信評) has lowered the credit ratings of Formosa Plastics Group’s (FPG,台塑集團) four major units by one notch over concerns that a global economic slowdown and volatility in oil prices would weigh on demand and profit recovery next year and beyond.
The downgrade came after the local arm of Standard & Poor’s Global Ratings (S&P) said it believed the operating environment would remain tough ahead due to the COVID-19 pandemic.
“We have lowered the long-term issuer credit ratings on the four core members of the group from ‘twAA’ to ‘twAA-,’” Taiwan Ratings said, referring to Formosa Plastics Corp (台灣塑膠), Nan Ya Plastics Corp (南亞塑膠), Formosa Chemicals & Fibre Corp (台灣化纖), and Formosa Petrochemical Corp (台塑石化).
Weak operating cash flows and high capital expenditures could keep their financial strength below earlier assumed levels for a prolonged period, despite a gradual recovery from the virus shock, the agency said, giving them a stable outlook.
The pandemic would seriously hurt the oil and chemical markets for the coming several quarters, dragging the recovery in the group’s debt ratio to earnings before interest, taxes, depreciation and amortization (EBITDA) next year and in 2022, it said.
The group’s revenue might decline by 25 to 30 percent, with the EBITDA margin shrinking to 10 to 11 percent this year, from 12.5 percent last year, Taiwan Ratings said.
Sales at the four units slumped 10 to 35 percent in the first half of this year, with three of them reporting losses, the agency said.
The group’s sales might recover by 20 to 25 percent next year, supported by an expected rebound in oil prices and the group’s capacity additions in the US and China, it said.
However, the group’s EBITDA margin would widen by only 12 to 14 percent next year, as tepid demand and capacity additions would limit the expansion of its product spread, the agency said.
Expansion of chemical capacity in the US and Asia from 2018 to 2022 could prevent significant improvement in the supply and demand conditions, if the virus crisis does not disrupt expansion schedules at all, it said.
Average selling prices for chemicals might remain soft and derail the recovery, it said.
Products such as ethylene, propylene and paraxylene, as well as their downstream derivatives, could come under pressure in particular amid weak demand globally, it said.
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