QATAR. Standard & Poor's Ratings Services today said it assigned its 'AA-' long-term corporate credit rating to Qatar-based petrochemical, fertilizer, and steel producer Industries Qatar QSC (Industries Qatar). The outlook is stable.
The rating on Industries Qatar reflects its stand-alone credit profile (SACP), which Standard & Poor's assesses at 'a-', and three notches of uplift for the extraordinary financial support we expect the Qatari government would provide to Industries Qatar if needed.
The State of Qatar (AA/Stable/A-1+) indirectly owns 70% of Industries Qatar, which we consequently consider to be a government-related entity (GRE) under our criteria.
Our view of Industries Qatar's "satisfactory" business risk profile is supported primarily by the company's excellent profitability, which stems from its access to competitively priced gas feedstocks (US$2.04/mmbtu in 2011) supplied by Qatar Petroleum (QP; AA/Stable/--).
Diversification by product and end market, economies of scale thanks to shared resources, and strong joint venture partners are further rating strengths. The ratings are constrained by the price-induced volatility of profits, as well as the cyclicality of Industries Qatar's petrochemicals and steel-production business units, and concentration of production sites in Qatar.
Industries Qatar's "modest" financial risk profile is underpinned by the company's low financial leverage and projected strong free operating cash flow generation at its petrochemical and fertilizer joint ventures. The company's significant historical capital expenditure and generous, progressive dividend policy somewhat offset the above strengths.
In accordance with our methodology for rating GREs, the rating also factors in our opinion that there is an "extremely high" likelihood that the Qatari government would provide timely and sufficient extraordinary support to Industries Qatar in the event of financial distress. We base our rating approach on our view of Industries Qatar's:
•"Integral" link to the government, based on Industries Qatar's 70% ownership by QP, which in turn is 100% owned by the State of Qatar.
•"Very important" role, which reflects the company's public policy role in economic diversification and wealth distribution in the Qatari economy.
The stable outlook reflects our expectations that our assessment of an "extremely high" likelihood of extraordinary government support to Industries Qatar, if needed, is unlikely to change over the next two years.
We could consider downgrading Industries Qatar in the event we revise our government support assumptions or if we downgrade the sovereign. For example, if the number of Qatari nationals holding Industries Qatar shares falls significantly, we could view this as a reduction of its public policy role and consequently lower our assessment of the likelihood of government extraordinary support to "high" and lower the rating to 'A+'.
Given our assessment of an "extremely high" likelihood of government support, all other things being equal, we would not lower the rating on Industries Qatar unless we lowered our SACP to below 'bb+'.
This is unlikely to happen in the near term given the company's current "satisfactory" business risk profile and "modest" financial risk profile. Still, we might envisage revising the SACP in the case of a prolonged and substantial drop in chemical, fertilizer, and steel prices and/or a large increase in gas feedstock prices.
We could raise the rating if we were to revise the SACP at least two notches, to 'a+' from 'a-'.