Fitch affirms SABIC at 'A+'; SABIC Europe at 'A'

The Outlook on the Long-term IDR remains Stable. Simultaneously, Fitch has affirmed SABIC Europe B.V.'s (SABIC Europe) ratings at Long-term IDR 'A', Short-term IDR 'F1' and senior unsecured 'A'. The Outlook on the Long-term IDR remains Stable.

The ratings for SABIC reflect its strong business position as one of the world's largest petrochemicals companies and its access to competitively-priced natural gas feedstock, which results in industry-leading profitability (38.2% EBITDAR margin in FY07) and cash-generation (cash from operations in excess of $12bn). The Stable Outlook reflects Fitch's expectation that SABIC will remain committed to its modest financial policy and that, based on its cost-competitive advantage, it will continue to exhibit credit metrics commensurate with the current ratings through the cycle.

In addition, the ratings reflect SABIC's relationship with its 70% shareholder, the Kingdom of Saudi Arabia ('AA-' (AA minus)/Outlook Stable), and assumed government support for SABIC, in line with the approach as laid out in Fitch's parent and subsidiary rating linkage criteria. Fitch recognises the government's strong influence on SABIC, as reflected in a five-out-of-seven members representation on the company's board. Fitch notes SABIC's strategic importance to the country in the government's efforts to leverage the value of the Kingdom's immense oil and gas feedstock reserves and to diversify the economy away from its strong focus on oil extraction. In addition, SABIC is a major employer in the Kingdom, providing an already large, and growing, number of jobs. These considerations are factored into the ratings and enhance SABIC's standalone credit profile by one notch. SABIC also benefits from the proximity of its production facilities to growing Asian markets.

The ratings are constrained by the high capital intensity and cyclical nature of the petrochemicals industry, where SABIC continues to derive the majority of its revenues from. In recent years SABIC has broadened its geographical reach and customer base with the acquisition of assets in Europe and the US and, recently, with a large-scale JV in Asia. It has also made progress in its efforts to diversify its product portfolio to increase the portion of revenues from specialty chemicals. The ratings also reflect the remaining execution risks of SABIC's sizeable $21bn investment programme up to 2009/2010. SABIC has undertaken this programme to achieve its ambitious growth targets, including an increase of production to 80 metric tons (mt) by 2012 from 55 mt in FY07.

SABIC's credit ratios for 2007 remained comfortable for the ratings, with an adjusted net debt/EBITDAR of 0.9x and a total adjusted debt/EBITDAR of 1.8x. Cash from operations covered more than 55% of total adjusted debt, while EBITDAR interest cover was in excess of 16x. As of Q2FY08, SABIC had cash and cash-equivalents of SAR52.85bn ($14.1bn), while debt stood at SAR90.3n ($24.1bn). On a consolidated basis Fitch expects adjusted net debt/EBITDAR to peak at 1.2x to 1.5x during the next two to three years, while SABIC will be free cash flow-negative based on its significant capital expenditure programme.

In line with Fitch's parent and subsidiary rating linkage criteria, SABIC Europe is viewed as strongly linked to its parent, SABIC. Notwithstanding the absence of any legal ties, such as guarantees or cross-default clauses, this linkage between SABIC and SABIC Europe is based on robust operational and strategic ties, 100% ownership and demonstrated tangible support. SABIC Europe's rating is thus closely correlated to its parent company's, with a one-notch differential to reflect the weaker standalone credit standing of the company. The Stable Outlook on SABIC Europe's rating is in line with the Outlook on SABIC's rating.