Against the backdrop of an improving petrochemicals market, Titan Chemicals – the largest integrated olefins and polyolefins producer in Malaysia – successfully closed a $700 million term loan refinancing in early January 2005.

The deal was designed to allow Titan to better match amortization schedules to cashflows and to cater to market capex plans. The overall goal of the refinancing was to get Titan's capital structure onto a strong footing to allow for a successful IPO. A successful IPO would strengthen Titan's balance sheet, result in a long-term sustainable debt level for the company and thus make the company less susceptible to the cyclicality of the petrochemicals market.

Titan's history

When its first polypropylene plant was commissioned in 1991, Titan was the first polyolefins producer in Malaysia. With its current production capacity at over 2 million tonnes per annum of petrochemical products, Titan is now the largest integrated olefins and polyolefins producer in Malaysia, and the second largest polyolefins producer and fourth largest olefins producer in South-east Asia. Titan's integrated facilities consist of 8 plants developed over 2 phases of expansion: 2 naphtha-based crackers, 2 polypropylene ("PP") plants, 3 polyethylene ("PE") plants and 1 aromatics extraction plant.

Titan is well-positioned as a petrochemical supplier and has:
• Highly efficient operations
• Strong cost position
• Good geographic location
• Wide range of products
• Integrated plant – good flexibility
• Loyal customers, 80% of which have been with Titan for more than 5 years.

In August 1997, Titan entered into a $840 million term loan with RHB Bank (RHB), Bank of Nova Scotia, Malayan Banking Berhad (Maybank), and J.P. Morgan Chase Bank. The loan was to finance Titan's Phase II expansion, which added a cracker, 3 PE/PP plants and the aromatics facility. The Phase II expansion program began in 1997, a time of increasing petrochemical demand, under-capacity and rising prices in the petrochemical industry. In reaction to the improving economics, the petrochemical industry witnessed a massive expansion spree in the region, in the hope of participating in the upside. However, later that year the Asian Financial Crisis unexpectedly hit and the subsequent prolonged global economic slowdown in the late 90's and early 2000 tipped the petrochemical industry into a period of over-supply. The industry stayed depressed for one of the longest times in its history (see chart below).

This industry downturn hurt the majority of petrochemical companies in the region and many were forced to restructure their debt – and Titan was not spared. With the startup of its Phase II expansion coinciding with this prolonged downturn, Titan had a significantly enlarged production capacity in a depressed market along with a highly geared capital structure. During this time Titan restructured and re-priced its existing loans. On the back of a recovery in the industry and steady improvement in its financial position, Titan sought to issue high yield bonds in 2004 to pay down part of the US dollar term loan and reduce its financial leverage. The company decided not to proceed when yields being sought were higher than the company was prepared to accept. At that point Titan decided to approach the bank market to refinance.

Key financing challenges

There were a number of key challenges facing Titan and its financiers in the refinancing effort.

1) Uncertain Petrochemical Cycle: Since late 2003 and the beginning of 2004, the petrochemical industry showed signs of recovery from the prolonged industry downturn. There was, however, some skepticism about the sustainability of the upward trend, particularly given the number of new plants being proposed in the Middle East. In addition, concerns on the sustainability of China's growing economy, which underpinned the petrochemical industry's demand, left some analysts skeptical.

2) Uncertain Oil Price: With oil prices hovering around $60 per barrel and with little expectation of a significant fall, questions have been raised about Titan's ability to pass through the increasing feedstock costs to their customers and to maintain a reasonable margin. In addition, increasing feedstock costs impact Titan's working capital requirements, leading to short-term liquidity concerns.

3) Feedstock Supply: A reliable and cost-competitive feedstock supply is key to a petrochemical operation. As Titan's feedstock is naphtha, Titan is effectively a price taker and is subject to the volatility of the crude oil price to which naphtha is linked. On the other hand, the use of naphtha feedstock has the benefits of diversifying Titan's product slate with products that do not compete with the Middle East's ethane based crackers.

4) Titan's History: The cyclical nature of the petrochemical industry requires a prudent capital structure to weather the peaks and troughs in the cycle. In the recent downturn, a number of petrochemical companies were over-leveraged and were severely impacted by the falling product margins. Titan's own financial past illustrated that its capital structure was relatively highly geared and was not sustainable during the prolonged industry downturn. A key concern of lenders was to reduce gearing to a more sustainable level.

Arranging mandate

In mid-2004 Titan began discussions with Standard Chartered Bank (SCB) to provide advice in structuring a refinancing to enable Titan to better match amortization schedules to cashflows and to cater to market capex plans. The overall goal of the refinancing was to get Titan's capital structure onto a strong footing to allow for a successful IPO. A successful IPO would strengthen Titan's balance sheet and result in a long-term sustainable debt level for the company.

Titan mandated SCB to structure the refinancing and SCB brought in Titan's key relationship banks, Maybank and RHB. As the structuring process reached its conclusion, SCB brought in WestLB and DBS Bank to form a Mandated Lead Arranger (MLA) group of 5 banks. The MLAs took the view that the recent petrochemical uptrend did signal a sustained industry turnaround and it was an ideal time for Titan to bring its debt levels to a prudent level. In addition, the MLAs were impressed with Titan's management team and were confident of their commitment to steer Titan in the right direction.

Their proposed business plan included measures to improve Titan's cost competitiveness and diversify its product mix away from the competitive Middle Eastern producers. Furthermore, a successful IPO would ensure that Titan's borrowing would be further reduced. In view of all these positive factors, the MLAs provided an underwritten 7-year limited recourse $700 million refinancing loan to Titan.

Refinancing structure

This refinancing loan was innovatively structured to address the lending market's concerns, provide Titan the required flexibility to weather the cyclicality of the petrochemical industry and to support a successful IPO. The key aspects of the loan were:

1) A $700 million refinancing loan consisting of 2 tranches:
a) Tranche A 7-year floating rate $500 million amortizing term term loan, and
b) Tranche B 18 month floating rate $200 million bullet bridge financing to be repaid by IPO proceeds.

2) In view of the industry cycle, Titan had wanted a term loan that was long enough to weather the potential downturn however the bank market was concerned with long tenors due to high leverage. The repayment structure of Tranche A was ingeniously crafted to overcome this inherent difference: a back-ended 7-year repayment profile with 50% of the principal to be repaid in the last 3 years and a cash sweep mechanism for the lenders to share the market upside with Titan. This cash sweep mechanism would prepay the loan from excess cash (post mandatory repayment) and effectively shortened the loan life. In addition, this provided Titan the advantage of a long loan life to ride out the next possible petrochemical downturn.

3) Titan was keen to get the IPO off the ground, and it wanted to be very careful about ensuring the right market conditions. Hence, Titan wanted an IPO bridging tranche that had a long enough tenor for it to seize the "right IPO window", but did not force an IPO if market conditions were not right. Understanding this requirement, Tranche B was structured as a bullet amortization, due upon the completion of the IPO or within 18 months from the drawdown date. To reduce the IPO risk that lenders had to bear, Tranche B was priced with margin step-ups (which incentivised an earlier repayment) and a cash sweep mechanism to reduce its outstanding amount.

4) The excess cash computation in the cash sweep mechanism took into consideration of Titan's capital expenditure program, thus providing Titan the flexibility to pursue its business objectives and strengthening its existing production facilities. Lenders took comfort from the fact that these capital expenditure programs would be limited to a pre-approved level. In addition, the cash sweep mechanism allowed Titan to pay out dividends in the event of a successful IPO, as the lenders recognized the need of dividend distribution for a successful IPO listing.

Syndications

The refinancing loan, with its carefully crafted structure and adequate pricing, was well received by the syndication market when it was launched. More than 15 banks participated in the site visit and management presentation, and when syndication closed the Refinancing Loan was over-subscribed. In addition to the MLAs, eight banks contributed about $150 million to participate in the refinancing, including Sumitomo Mitsui Banking Corporation, KBC, BNP Paribas, Calyon, Chinatrust Commercial Bank, Shanghai Commercial and Savings Bank, Bumiputra Commerce Bank, and Aozora Bank.

IPO listing

With the successful financial closing, Titan was well positioned to pursue its IPO listing plans. Titan successfully convinced the equity market that it has the support of a respectable lending group who believed in their business plan. In addition, its capital structure was revamped to provide flexibility to ride with industry characteristics. Titan subsequently filed its IPO listing in 1H 2005 and then went on road-shows in 2H 2005. In late June 2005, Titan successfully raised $208 million (US dollar equivalent) in the IPO.

Looking forward

Titan is now a stronger company with a capital structure geared for the future. Standard and Poor's immediately upgraded Titan's rating from B- to BB- after the debt refinancing, and following the IPO, Titan's rating was further increased to BB.