Fitch Ratings has downgraded Petkim Petrokimya Holdings A.S.’s (Petkim, subsidiary company of SOCAR Türkiye) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B-' from 'B', Report informs referring to Fitch website.
The Rating Outlook is Stable. In addition, Fitch has assigned a new 'B-'/'RR4' senior unsecured debt instrument rating.
“The downgrade of Petkim Petrokimya Holding A.S.'s Long-Term IDR reflects deterioration in credit metrics due to a decline in petrochemical margins, expectations of subdued recovery in earning and high EBITDA net leverage forecast consistently above 3.5x through to 2026. The downgrade also considers deterioration in FCF generation impacted by weaker profits and higher interest costs.
The Stable Outlook mirrors our expectations of gradual normalization of the company's earnings to mid-cycle levels and increased support of the ultimate majority parent, State Oil Company of the Azerbaijan Republic (SOCAR; BB+/Positive) and our expectation that parental support for liquidity will continue to be provided.
In addition, Petkim's rating reflect its small scale, single-site petrochemical complex and its exposure to cyclical commodity polymers, which results in inherent earnings volatility. Positively, Petkim's business profile benefits from a well-invested asset base, a strong position in the domestic petrochemical market and some resilience to foreign exchange volatility,” reads the message.
“Challenging market conditions continued to pressure pricing of petrochemical products in Turkiye and Europe since end of Q4 22 through to 2023. Despite Petkim's efforts to optimize costs, its EBITDA margins dropped below 2% in H123 from around 9% in FY22. Fitch assumes muted recovery in the near term with EBITDA margins of around 3% in FY23 followed by moderate growth to around 6% in 2024. Fitch assumes return to mid-cycle EBITDA levels from 2025, amounting to 9.5%.
EBITDA is expected at approximately $62 million in 2023, $159 million in 2024 and recover to an average of approximately $240 million per annum in 2025-26.
“Almost 80% of total cash costs are denominated in US dollars as its major feedstock, naphtha, is purchased in that currency. Simultaneously, the majority of sales is denominated in US dollars and euros, or indirectly driven by lira price indexation to US dollar benchmarks. This supports Petkim's EBITDA during periods of lira devaluation, 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,” Fitch noted.
Petkim currently sources around 80%-90% of naphtha feedstock from STAR and accounts for 10%-15% of refinery output. Exposure to a concentrated supply source is mitigated by its proximity to alternative supply sources from the Black Sea region and Russia.
Petkim is a Turkish commodity chemical producer, making plastics and intermediates from naphtha. Petkim has a strong position in the domestic market; however, its small scale and single-site operations with limited integration are key factors in its business profile.