Fitch affirms SABIC long-term IDR at 'A'

Fitch Ratings affirmed Saudi Basic Industries Corporation (SABIC)'s Long-Term Issuer Default Rating (IDR) at 'A', but revised its Outlook to Negative from Stable, and.

The assessment of SABIC's standalone credit profile (SCP) is unchanged at 'a+', which reflects the company's cost leadership and conservative financial profile. SABIC's leverage should remain strong, although we forecast its 2020 revenue to drop almost 25% and its 2020 EBITDA margin to decline to below 20%, driven by pandemic-related disruption complicating the petrochemical market oversupply.

“We expect free cash flow (FCF) to turn negative at 8% of sales in 2020-2021, and funds from operations (FFO) net leverage to increase to 0.5x by end-2021 from -0.1x at end-2019, and to remain at a moderate level,” the rating agency said.

Fitch added that it expects only partial recovery in 2021 as demand for polymers, such as polyethylene and polypropylene, reverts to above-GDP growth.

“We conservatively expect oversupply to be fully absorbed by demand no earlier than 2022. Coupled with SABIC's deconsolidation of its four 50%-owned entities, we expect this to lower 2020 EBITDA to under SAR20 billion, with margins under 20%, before a gradual rebound towards SAR30 billion (25%) by 2022-2023,” the rating agency pointed out.

Elsewhere, Fitch added that it does not expect the economic substance of SABIC's relationship with the four JVs to change as a result of the new accounting treatment. SABIC's scale remains significant versus most 'A' category chemical peers despite the deconsolidation of the JVs.