Polytama's secured notes rated B2

JAKARTA (JP): Moody's Investor Service has assigned a B2 rating to the proposed $200 million guaranteed secured notes due 2007 of Polytama International Finance B.V.

The notes are guaranteed by PT Polytama Propindo (Polytama), an Indonesian chemical company.

This is the first time Moody's has rated the debt of either of these entities.

Moody's said Thursday that positive factors supporting the B2 rating include Polytama's position among the leading local producers of polypropylene (PP) in Indonesia, a competitive position that benefits from tariff protection, and a feedstock price structure that offers the company the potential to mostly avoid what Moody's expects will be higher prices for the feedstock propylene in Asian markets.

Factors limiting the rating include the company's small revenue base and narrow product slate, high financial leverage and limited financial flexibility, and significant margin volatility attributed to the cyclicality of its products and raw materials.

The possibility of further disruptions to feedstock supplies, as the company experienced on several occasions since commencing production in 1995, could also impact margin volatility and represents a risk to the firm's profitability, Moody's added.

Formed in 1993, Polytama is a small, non-integrated Indonesian polypropylene producer with a nameplate capacity of 180,000 tons per year, making it the second largest supplier of PP in local markets, where the primary end-uses include food packaging, carpet backing, woven sacks, yarns and ropes.

A very low level of per capita consumption of plastics in Indonesia supports a favorable growth outlook for PP demand.

During 1996, the first full year of operation, the company produced roughly 138,000 tons of PP, generating sales of Rps. 279 billion ($US117 million) and net profits of Rps. 35.2 billion.

On a pro forma basis (including interest costs on the new debt and assuming a higher average net profits approximate Rp 20 billion and generate EBITDA/interest of just under 2.0 times, according to Moody's analysis.

However, near term profits and coverage measures are expected to come under pressure as PP supply is expected to exceed demand on global markets.

In the medium term, dividends from Polytama II should raise the level of earnings and cash flow. Polytama's competitive position and product pricing benefit from the current 40 percent tariff on imported PP.

However, this advantage is likely to erode over time given the government's position to reduce tariffs gradually as agreed with other ASEAN countries by 2003.