KUALA LUMPUR: Moody's Investors Service has assigned a Ba3 corporate family rating (CFR) to Press Metal Aluminium Holdings Bhd's proposed senior notes of up to US$400mil (RM1.7bil).

Press Metal's recently-incorporated unit Press Metal (Labuan) Ltd will undertake the issuance of the issue US-dollar denominated senior notes due 2022.

The ratings agency said on Monday the notes will be guaranteed by Press Metal, and key subsidiaries including 100%-owned Press Metal Bhd and 80%-owned Press Metal Bintulu (PMB) and Press Metal Sarawak (PMS).  Together, PMB and PMS own and operate all of Press Metal's aluminum smelting capacity.

“The rating outlook is stable. The proceeds of the notes issuance will be primarily used to repay existing indebtedness,” it said.

Press Metal is the largest aluminium producer and extruder of aluminum products in Southeast Asia.

"The Ba3 CFR reflects Press Metal's low-cost aluminum smelting capabilities, supported by a long-term power purchase agreement with Sarawak Energy, solid Ebitda (earnings before interest, tax, depreciation and amortisation) margins, conservative financial policies, and low financial leverage with debt/EBITDA, expected to be around 2.0 times in 2017," said  Moody's vice president and senior credit officer Brian Grieser.

Press Metal generated Ebitda margins in the mid-to-high teens over the past three years. The company benefits from a low cash cost per ton relative to other aluminum producers, driven primarily by its access to low energy tariffs as part of its 25-year power purchase agreement with Sarawak Energy.

“We expect Press Metal to maintain its cost advantages, which partially mitigate the price risk on its aluminum sales. Margins also benefit from low employee and logistic costs, and the correlation between the price of aluminum and alumina, which represents the largest component of its cash costs.

“Press Metal's CFR also incorporates its small scale relative to global competitors, limited operational track record, and exposure to the volatility in the prices of aluminum and raw materials,” he said.

The ratings also reflect Press Metal's geographic concentration, with all its aluminium smelting capacity located in Sarawak, Malaysia (A3 stable) and its dependence on Bakun Dam's hydro-electric power plant – operated by Sarawak Energy -- to supply all the power needs of its two smelter locations.

Press Metal's longstanding relationship with Sumitomo Corporation (Baa1 negative) as an investor, customer and marketer of its products is a positive credit consideration. 

Sumitomo owns a 20% share of both PMB and PMS, is the largest purchaser of its aluminum production, and maintains board representation at the PMB and PMS level.

The proceeds from Sumitomo's equity contributions supported the construction of the aluminum smelting facilities in a financially conservative manner.

Grieser said: "We view the ownership by Sumitomo and its level of aluminum purchases as a credit positive for Press Metal. We expect Sumitomo to remain a supportive shareholder and influence Press Metal to manage its balance sheet and growth strategy in a conservative manner.

"The stable outlook incorporates Moody's expectation for modest revenue growth coupled with Ebitda margins in the mid-to-high teens over the next 12-18 months. 

"Further, capital expenditures are expected to be largely focused on the maintenance of existing facilities and efficiency improvements, which will facilitate free cash flow generation and debt reduction over this period."

The ratings are well positioned at Ba3. Over the longer term, increased production capabilities and growth in its value-added product sales would be supportive of an upgrade, assuming Ebitda margins are consistently above 20% and leverage is maintained below 2.0 times. 

An upgrade is unlikely in periods of significant investment where free cash flows are negative.

The ratings could be downgraded if there were a material erosion in Press Metal's profitability, driven either by extended operational shutdowns, increases in power costs, or extended tightening of alumina-to-aluminum pricing, such that Ebitda margins fall below 15% for an extended period.

“Further, rating pressure would materialise if debt/Ebitda is maintained above 3.5 times for an extended period, or liquidity were to deteriorate from a weakening of cash balances or cash flows.