SABIC’s rating unchanged at ‘A’, no impact from COVID-19 in Q2 2020: Fitch

SABIC's (A/Stable) YoY loss of over half of its EBITDA in 2Q20 came in line with Fitch Ratings expectations, supporting its full-year forecast of almost a 45% drop in EBITDA and is neutral to SABIC's rating, the ratings agency said.

“We expect SABIC's weak performance to have bottomed out in Q2 2020 and earnings to progressively recover by end-2020. Its ratings remain intact and aligned with its parent Saudi Arabian Oil Company (Saudi Aramco, A/Stable), reflecting overall moderate ties between the two companies,” Fitch added.

The weak market fundamentals and SABIC's deconsolidation of its four 50%-owned entities are forecast to drive 2020 EBITDA to under SAR20 billion, with margins subdued at around 20%, before a gradual rebound towards SAR30 billion with margins of about 25% by 2022-2023. Meanwhile, funds from operations (FFO) net leverage are likely to increase in 2020, and are expected to remain low at below 1x over 2020-2023.

While the pandemic has minimal impact on the major petrochemical producer’s operations or shipments, its effect on petrochemical pricing is significant and temporarily dilutes SABIC's historical cost advantage over the higher-cost but non-integrated players. Added petrochemical capacities will have to be absorbed by demand before we see the recovery in pricing. We expect recovery to start from 2021 as polymers demand - like polyethylene or polypropylene - reverts to above GDP growth.

SABIC reported a drop in EBITDA in Q2 2020to SAR3.5 billion compared to SAR4.4 billion and SAR7.6 billion restated in Q1 2020 and Q2 2019 results, respectively. Revenue continued to decrease in Q2 2020 despite higher petrochemicals sales volumes quarter-over-quarter. H1 2020 sales dropped by more than 20% yoy to SAR54.8 billion, due to oversupply in petrochemicals, global GDP deceleration and pressure in selected markets such as automotive.

SABIC's alignment of its accounting policy with Saudi Aramco from Q2 2020 has neutral impact on leverage. It now treats three 50%-owned JVs under the equity method and another under the joint operations accounting method. Based on restated 2019 figures, net debt-to-EBITDA was reduced by 0.1x. In our FFO and FFO leverage metrics, we would expect EBITDA reduction to be mitigated by increasing dividends from the deconsolidated entities.

SABIC's rating alignment with that of Saudi Aramco is in accordance with Fitch's Parent and Subsidiary Rating Linkage Criteria, which we apply following SABIC's acquisition by Saudi Aramco. The ratings agency’s assessment of SABIC's Standalone Credit Profile is unchanged at 'A+', which reflects the company's cost leadership and conservative financial profile.