S&P Global Ratings revised the outlook on four core units of the Formosa Plastics group to negative from stable and affirmed their A- long-term issuer credit ratings, citing a material risk that the Taiwanese materials group's debt load could be elevated for a prolonged period.
The outlook revision on Formosa Plastics Corp., Formosa Petrochemical Corp., Formosa Chemicals & Fibre Corp. and Nan Ya Plastics Corp. reflect the rating agency's view that the four core units will be unable to reverse the group's weakened profitability and cash flow generation before 2020-end, resulting in the group's debt-to-EBITDA ratio exceeding 2x for an extended time.
S&P Global Ratings expects revenue for the four units to decline by 10%-12% in 2019 as market uncertainty linked to global trade tensions risks eroding demand and keeping inventory levels low. The rating agency also expects the group to expand capital expenditure to support capacity expansion starting next year, which could lead to a rise in the company's debt leverage and constant negative free operating cash flow.
The rating agency sees the group's EBITDA margin settling within a range of 13%-16% in 2019-2020, while its debt-to-EBITDA ratio will fall within 2.0x to 2.3x over the period.
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