Fitch Affirms JSC SIBUR at 'BB+'; Outlook Stable
January 17, 2014 Fitch Ratings
Fitch Ratings has affirmed Russia-based petrochemical group JSC SIBUR Holding's (SIBUR) Long-term Issuer Default Rating (IDR) at 'BB+' with Stable Outlook. SIBUR Securities Limited's five-year USD1,000m notes, guaranteed by SIBUR and due 2018, have also been affirmed at senior unsecured 'BB+'. The Short-term IDR has been affirmed at 'B'.
Although we expect poor market conditions in synthetic rubbers to translate into weaker results than forecasted under our previous 2013 base rating case, the ratings continue to be supported by SIBUR's leading position in the Russian petrochemicals sector, its diversified portfolio and its access to competitively priced feedstock. This in turns underpins its strong operational cash flow generation over the cycle.
The group's ratings are constrained by higher-than-average systemic risks associated with the Russian business and jurisdictional environment. Excluding these risks, SIBUR's credit profile is assessed at the 'BBB' category.
KEY RATING DRIVERS
ZapSib-2 Project Decision Critical
SIBUR continues its evaluation on the ZapSib-2 multi-billion-dollar project, which would entail the construction of an integrated production complex in Tobolsk, with 1.5mtpa ethylene, 1.5mtpa polyethylene (PE) and 0.5mtpa polypropylene (PP) capacity. The final investment decision was recently postponed to no earlier than end-1H14. The project's characteristics, including its size, implementation schedule and financing structure, could have a significant impact on the company's leverage and coverage metrics, and thus remain one of our key rating issues.
Diversification Mitigates Synthetic Rubber Downturn
9M13 sales were down 0.7% yoy at RUB197.6m and the reported EBITDA margin fell to 28.8% from 30.3% a year earlier. This is 8%-10% below Fitch's previous base rating case for 2013, and reflects largely a 20% drop in synthetic rubber sales due to weak global demand and pricing pressure. The results were also affected, to a lesser extent, by lower prices for energy products. These trends were partly offset by neutral-to-positive volume growth across other segments. While visibility on a potential upturn in the synthetic rubber market remains poor, the group's competitive cost base and diversified product portfolio should support its ability to compete and maintain volumes and capacity utilisations in 2014.
Tobolsk-Polymer Polypropylene Plant Launched
SIBUR successfully launched its 500ktpa PP capacity in Tobolsk (Western Siberia) in October 2013. The USD2bn project is part of the group's efforts to build up a value chain over its competitive petrochemical feedstock, and is expected to result in a modest surplus in the Russian PP market in 2014 as it continues its ramp-up. Our base case assumes some pricing pressure in 2014 as a result. According to SIBUR, the plant is in the top decile of the global PP cash cost curve, which underpins its competitiveness in the domestic and export markets.
Liquidity tightened at end-9M13 with cash balances of RUR5.8bn and undrawn committed general corporate purpose facilities of RUR21bn against maturing short-term debt of RUB38bn. Debt remained roughly flat at RUB94bn at end-9M13 (FYE12: RUB96bn), as cash flow from operations boosted by working capital relief covered dividends and high capex. Under our base rating case, free cash flow (FCF) margin will remain at negative in the single digits and net FFO-adjusted leverage is expected to have peaked at 2.0x at end-2013. The ratings assume that SIBUR will continue to access long-term funding to refinance upcoming maturities and finance its expansion plans.
Capex Moderated, ZapSib-2 Contingency
With the completion of large-scale projects such as Tobolsk-Polymer PP plant, the Ust-Luga LPG and light oils transhipment facility, second gas Fractionation unit (GFU) in Tobolsk, and Pyt-Yakh-Tobolsk 1,100km raw NGL pipeline project, Fitch's base rating case assumes capex to moderate towards 18%-20% of sales from 2013 onwards, down from 23%-27% over the previous three years. This new capex level allows for new expansionary investments but excludes the ZapSib-2 project. The 2013 base case also assumes that 25% of IFRS net income will be paid out to shareholders (dividend policy). FCF is expected to remain negative in 2013 due to high capex and weaker operational cash flows.
Industry and Country Risks
SIBUR is exposed to the inherent risks of the petrochemical industry - price volatility and demand cyclicality. The ratings are also constrained by the legal and regulatory risks associated with Russia, where its key assets are located.
Positive: Future developments that could lead to positive rating actions include:
- Further operational improvements and capacity expansion resulting in enhanced scale and product diversification and/or portfolio mix
- FFO net adjusted leverage at, or below 1.5x through the cycle
- Sustained positive FCF generation
Negative: Future developments that could lead to negative rating action include:
- Material deterioration in the company's cost position or access to low-cost associated petroleum gas
- Sustained negative FCF generation
- Aggressive financial or investment strategy, including aggressive debt financing of the prospective ZapSib-2 project, that result in an increased financial burden and FFO adjusted net leverage above 2.0x on a sustained basis
Country of riskRussia
Redemption (put/call option)
М/S&P/F— / — / —
Company — SIBUR
Full nameopen joint stock company SIBUR
IndustryChemical and petrochemical industry