Moody's downgrades SMC credit rating on Petron plan

MANILA, Philippines - New York-based Moody’s Investor Service downgraded the credit rating of conglomerate San Miguel Corp. after it decided to acquire an additional stake in Petron Corp.

The international rating agency downgraded San Miguel’s speculative credit rating to Ba3 or a ranking in the lower end of the generic rating category from Ba2 or a mid-range ranking.

A speculative credit rating shows that there is substantial credit risk particularly as a result of adverse economic change over time but business or financial alternatives may be available to allow financial commitments to be met.

Moody’s vice president and senior analyst Ken Chan said in a statement that the rating downgrade reflects the escalating and evolving notion of San Miguel’s risk profile as a result of its target to diversify around half of its base into new businesses.

“The transaction to acquire Petron is part of this strategy to transform its business, and will mean a higher level of cash flow volatility for San Miguel and a negative impact on its credit profile once the oil company’s more leveraged balance sheet is fully consolidated,” Chan said.

Last month, San Miguel announced that it would exercise its option to purchase 40 percent of a unit of British investment house Ashmore Group that holds a 50.1 percent stake in the leading oil refining and marketing company in the Philippines.

San Miguel earlier signed a so-called option deal with Ashmore unit SEA Refinery Holdings BV, which gave San Miguel the chance to buy up to 100 percent of SEA Refinery Corp., which owns majority of Petron shares.

Ashmore owns 91 percent of Petron after it bought the government’s 40-percent interest in the oil refiner for P25.6 billion in December 2008. SEA Refinery holds 50.1 percent of Ashmore’s total interest in Petron.

SMC also has an option to acquire an additional effective 30 percent stake in Petron before end-2010.

San Miguel has a cash on hand of around $2.9 billion to bankroll that acquisition that would cost between $290 million and $420 million.

“The current Ba3 rating also continues to reflect San Miguel’s strong brand equity and commanding positions in the Philippines branded beverage and processed food markets,” Moody’s said.

Moody’s retained the stable credit rating outlook of San Miguel.

“The stable outlook reflects San Miguel’s strong balance sheer liquidity, which provides a buffer for future investments and the potential of higher cash flow volatility,” the credit rater added.

According to Moody’s, the possibility of upward rating pressure is limited in the next few years given San Miguel’s evolving business model and credit profile.

On the other hand, negative rating pressure could arise if San Miguel sells down its more stable food and beverage divisions, further lifting its business risk profile or significantly raises its debt level to fund its investments.