SABIC Capital I B.V. -- Moody's affirms SABIC A1 rating and upgrades BCA to a1; outlook stable

RATINGS RATIONALE

Today's upgrade of the BCA reflects the sustained improvement in operating performance and financial metrics reported by SABIC following the completion of a number of key growth projects, which have contributed to enhance its overall revenue and cash generating capacity while trading conditions in the chemicals markets strongly recovered from the sharp downturn of late 2008/early 2009. Concurrently, the affirmation of SABIC's A1 rating and removal of the one-notch uplift relative to the BCA reflects the moderate distinction maintained by Moody's between the ratings of the Kingdom of Saudi Arabia (KSA) and those of its strongly supported government-related issuers (GRIs).

In 2011, SABIC successfully completed a major capex expansion programme, which had seen the group invest in excess of USD30 billion in the previous five years (equivalent to nearly 20% of group revenues). The commissioning of the Yansab, Sharq and Saudi Kayan facilities and ensuing production ramp-up, helped fuel further volumes growth. In 2011, SABIC reported total production of over 69 million metric tonnes, as its KSA facilities operated at close to full capacity, while utilisation rates at its international foreign affiliates, SABIC Innovative Plastics and SABIC Europe, further recovered and topped 80%.

Against the relatively benign trading conditions and favourable pricing environment that have been prevailing within the petrochemical sector in recent years, this has enabled SABIC to report significant growth in operating profitability and cash flow. In the past year, the group has reported funds from operations ranging between SR54 and SR57 billion (USD14.6-15.3 billion) on a last twelve-month basis. Following an extended period of negative free cash flow, this increase in operating results in parallel with capex falling back to an annual average of SR11 billion, has allowed SABIC to generate a substantial cumulative cash surplus close to SR17 billion (USD4.5 billion) since the start of 2011, despite the recent marked step-up in dividend payout. SABIC has been able to reduce net debt by 27% to SR49.7 billion (on a fully adjusted basis) in the same period.

Looking forward, Moody's cautions that the downward pressures on product pricing witnessed in the petrochemicals markets in recent quarters may intensify going into 2013, as new capacity is expected to come on stream at a time when global economic growth conditions are uncertain. That said, SABIC is well equipped to withstand any sector downturn given its highly competitive cost position that is underpinned by the significant economies of scale afforded by its world-scale vertically integrated facilities as well as its access to significantly cost-advantaged feedstock sourced under long-term contracts with 100% government-owned Saudi Aramco.

Therefore, Moody's considers that SABIC's enhanced cash flow generating capacity boosted by the incremental contributions from its recently commissioned facilities combined with lower capex (in the region of 10% of sales) and benefits accruing from working capital initiatives, will enable the group to sustain, at least in part, the significant recovery in credit metrics reported in the past eighteen months, during which retained cash flow (RCF) to net debt averaged around 60%.

The a1 BCA is predicated on Moody's expectation that SABIC will be able to accommodate its 2020 growth strategy (including potential bolt-on acquisitions) and stepped-up cash distributions to shareholders, while maintaining strong credit metrics (such as RCF to net debt in the mid-40s level and net debt to EBITDA close to 1.0 x) and keeping comfortably free cash flow positive through the cycle.

The outlook for the A1 rating is stable reflecting Moody's expectations that SABIC will be able to maintain a stand-alone credit profile in line with the a1 BCA.

Considering the group's operating risk profile and capital structure, and the moderate distinction maintained by Moody's between the ratings of the Kingdom of Saudi Arabia and those of its strongly supported GRIs, Moody's does not expect any upward rating pressure to develop on SABIC's rating in the near to medium term.

Conversely, while unlikely at this juncture, SABIC's A1 rating could be downgraded should 1) its BCA fall towards the low end of the single-A category as a result of a marked and prolonged deterioration in underlying operating performance and/or a significant step-up in investment spend (including a material debt-funded acquisition) leading to the adoption of a more leveraged capital structure, with Net Debt to EBITDA close to 2.0x through the cycle and 2) Moody's current assumption of strong support be revised downward.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Saudi Basic Industries Corporation and SABIC Capital I B.V. was the Global Chemical Industry Methodology published in December 2009. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Riyadh, Saudi Arabia, SABIC is a diversified industrial conglomerate that is 70%-owned by the Kingdom of Saudi Arabia and principally active in petrochemicals, fertilisers and metals with consolidated revenues of SAR190 billion in 2011.

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