S&P downgrades Formosa Plastics companies to BBB amid profit woes

Investing.com -- S&P Global Ratings has downgraded Formosa Plastics Corp. and three related companies to ’BBB’ from a higher rating, with a negative outlook due to weakened leverage and profitability.

The credit rating agency’s action affects Formosa Plastics Corp., Nan Ya Plastics Corp., Formosa Chemicals & Fibre Corp., and Formosa Petrochemical Corp., citing low prospects for recovery in their financial performance over the next one to two years.

S&P expects chronic overcapacity and challenging macroeconomic conditions to continue impacting the companies’ profitability in the coming quarters. Aggressive capacity additions by Chinese competitors in commodity chemical products could limit utilization and keep product spreads thin in 2025, particularly for ethylene, propylene, and their derivatives.

The rating agency forecasts that the companies’ commodity chemical businesses will mostly continue to incur operating losses in 2025 before breaking even in 2026. Rising trade tensions and slowing economic growth, especially in China, could further weigh on demand for commodity chemicals in Asia.

Some segments are expected to perform better. Formosa Petrochemical’s oil refining business may see gradual improvement as lower oil prices stimulate demand amid limited capacity additions in 2025-2026. Nan Ya Plastics’ electronics material business and the group’s differentiated products could also support a stronger recovery, though not enough to significantly lift consolidated performance.

S&P forecasts the four companies could increase their EBITDA to about NT$87 billion in 2025 and NT$95 billion in 2026 from NT$60.8 billion in 2024. This improvement should enable them to return to positive discretionary cash flow and reduce debt slightly in 2025-2026.

The debt-to-EBITDA ratio is expected to improve to about 4.3x in 2025 from 6.7x in 2024, partly supported by the removal of debt guarantees for the group’s Vietnam-based steel subsidiary. However, S&P believes the ratio will improve slowly to about 3x in 2027.

The negative outlook reflects the risk that chronic oversupply in Asia’s chemical market could limit earnings recovery over the next 12-24 months, preventing improvement in the consolidated debt-to-EBITDA ratio to below 3.5x during this period.

S&P noted that a downgrade could occur if the ratio fails to decline below 3.5x, while an outlook revision to stable might happen if the companies can improve and sustain the ratio materially below 3.5x.

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