Fitch Affirms Lotte Chemical Titan Nusantara; Withdraws Rating
OREANDA-NEWS. Fitch Ratings Indonesia has affirmed Indonesia-based PT Lotte Chemical Titan Nusantara's (LCTN) National Long-Term Rating at 'A+(idn)'. The Outlook is Stable. The agency has simultaneously withdrawn the rating.
The rating has been withdrawn as it is no longer considered by Fitch to be relevant to the agency's coverage. LCTN has no public bonds outstanding after having repaid IDR73bn of bond and IDR200bn of sukuk ijarah in June 2015. Fitch will no longer provide rating or analytical coverage of this issuer.
LCTN's rating reflects its strong ties with its parent, Malaysia's Lotte Chemicals Titan Holding Sdn. Bhd. (LCTH) and linkages with its ultimate parent, South Korea's Lotte Chemical Corporation (Lotte Chemical). Although the standalone credit profile of LCTN remains weak, financial support, including substantial indirect working capital support, helps LCTN maintain adequate liquidity.
'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.
KEY RATING DRIVERS
Ratings Linked with Parent: The ratings of LCTN are closely aligned with the credit profile of its 95% shareholder, LCTH, in line with Fitch's parent and subsidiary methodology. In Fitch's view, there are strong strategic and operating links between the two. LCTH's credit profile is considerably stronger than the standalone credit profile of LCTN; it benefits from a dominant market position in Malaysia, vertical integration, larger scale, and its linkages with its 100%-owner, South Korea's Lotte Chemical.
Tangible Shareholder Support: LCTN procures over 85% of its raw material through LCTH's subsidiaries. These purchases come with substantial payment flexibility, effectively providing indirect financing. In addition, LCTN continues to use a shareholder loan of USD28.6m after having repaid bonds and sukuk ijarah totalling IDR273bn in June 2015.
Weak Standalone Credit Profile: LCTN suffers from a lack of vertical integration and low product diversification. It uses an intermediate product ethylene, instead of cracking naphtha, to produce only two end-products - high-density polyethylene (HDPE) and linear low-density polyethylene (LLDPE). As a result, its margins are generally low and highly volatile. LCTN's EBITDA margin remained weak at less than 2% in 9M15, in contrast to the significant improvement in profitability of naphtha crackers in 2015.
Strategically Important Subsidiary: Fitch considers both the Malaysian and Indonesian operations to be strategic assets for Lotte Chemical, the ultimate parent of LCTN and LCTH. Fitch believes that Lotte Chemical would continue to support LCTN, given its strategic importance and the implied reputational risk from carrying the same brand name.
Fitch's key assumptions within the rating case for the issuer include:
- Sales volume to increase from 2016 on the back of improved feedstock supply.
- Narrower polyethylene-ethylene spreads in 2016 compared to 2015. Spreads assumed to improve gradually thereafter.
- Minimal capex, related to maintenance.
- Continuing financial assistance from parent, LCTH.
No longer relevant as the ratings have been withdrawn.