The Ukraine conflict is raising commodity and energy prices, and increasing market volatility in Asia-Pacific. S&P Global Ratings expects these factors will have the most relevant and immediate credit consequences for the corporate sector in the region. A protracted conflict hitting investor sentiment well into 2022 will complicate access to funding for weaker credits dependent on capital markets to refinance.

Asia-Pacific entities typically have little or no direct exposure to Russia or Ukraine in terms of revenues, assets, or supply chains. Russian airlines and cargo are an immaterial contributor to traffic at Asian ports and airports, for example.

Here we address investor questions on the direct and indirect effects of Ukraine conflict on rated companies in Asia-Pacific, summarizing some of the sector-specific commentaries published over the past few days.

Frequently Asked Questions

Will the Russia-Ukraine confrontation tighten funding access in Asia-Pacific?

We believe so. The knock-on effect of the conflict on investor sentiment and access to funding are likely to have a more pronounced effect on the credit quality of weaker issuers than any direct exposure the entities might have to Ukraine or Russia. Roughly two dozen issuers in the region at the 'B' rating level and below are exposed, particularly if they depend on capital markets to refinance maturities in 2022 or 2023. A few such weaker-rated issuers have recently postponed proposed bond issues due to market volatility.

South and Southeast Asia 

Volatility in capital markets and a risk-off investor sentiment persisting well into 2022 could complicate the refinancing plan of weaker issuers reliant on capital markets to refinance upcoming maturities.

In India, two issuers recently postponed bond issues due to market volatility: Vedanta Resources Ltd. (B-/Stable/--) and Mumbai International Airport (unrated). For Vedanta and oilfield services Geophysical Substrata Ltd. (B-/Stable/--), a refinancing delay lasting beyond the next few months could strain ratings.

In Southeast Asia, weaker-rated issuers that rely on capital markets include coal producer PT Bumi Resources Tbk. (CCC/Negative/--) with about US$1.2 billion in debt maturing at the end of 2022, container lessor IBC Capital with nearly US$587 million of a term-loan facility due in 2023, and real estate developer PT Kawasan Industri Jababeka Tbk. (B-/Stable/--) with a US$300 million bond maturing in October 2023.

China 

Investor sentiment remains very weak for the Chinese real estate sector. The domestic policy situation and issuers' own characteristics mainly determine their ability to access markets and refinance, with geopolitical settings less of a consideration. Rated issuers in the sector rated 'B' or below that face both dollar-bond repayments and a dependency on capital markets include Greenland Hong Kong Holdings Ltd. (B/Negative/--), Landsea Green Properties Co. Ltd. (B/Stable/--), Xinhu Zhongbao Co. Ltd. (B/Stable/--), Jiangsu Zhongnan Construction Group Co. Ltd. (B-/Negative/--), and Dexin China Holdings Co. Ltd. (B/Negative/--).

Outside of the real estate sector, current market volatility could also complicate access to funding for CAR Inc. (B-/Stable/--) and data center operator VNET Group Inc. (B/Stable/--).

Japan/Korea/Pacific 

The ratings on very few issuers are at risk in this largely investment-grade universe. The companies we rate in these regions have conservative balance sheets, significant discretionary cash flows, ample cash balances, and well-established funding channels. Weaker-rated issuers in these countries include the U.S. hotel subsidiary of Korean Airlines Co. Ltd., Hanjin International Corp. (B-/Negative/--), which has substantial maturities at the end of 2022 and early 2023, and Japan-based gaming machine and casino company Universal Entertainment Corp. (CCC+/Negative/--).

How are rising commodity and energy prices hitting rated companies in Asia-Pacific?

Rising energy and commodity prices are a net negative on the margins for most rated sectors. On March 1, 2022, we raised by about 15% our base-case pricing assumption used for the credit analysis of oil and gas producers globally. Brent prices will likely average US$85 per barrel in 2022 compared with US$75 per barrel previously. Brent prices are well above US$100 per barrel and remain extremely volatile. Prices of minerals such as nickel, coal, and copper are reaching multiyear highs, as are agricultural commodities such as wheat.

At the same time, demand and consumer sentiment have not fully recovered from the COVID-19 pandemic across Asia-Pacific. Sectors or companies with a high share of raw material or feedstock expenses in their cost base will face difficulty passing rising input costs to customers. Government-imposed price caps in certain countries such as Indonesia will add to margin compression. Some sectors with steadier underlying demand, such as electronics and semiconductors, will be able to pass through cost inflation, in our view.

Are rising oil and gas prices credit positive for regional producers?

This really depends on the producer product mix, level of integration, domestic taxation, and price controls for refined petroleum fuels (see "South And Southeast Asia Oil Nationals To See Revenue Boost As Europe Looks East For Energy Supply," published March 7, 2022 and "China's Refiners Feel The Heat As Oil Nears US$130," published March 7, 2022.)

Marginally negative to negative 

In Indonesia, rising energy prices will deepen downstream losses of state-owned Indonesian energy company PT Pertamina (Persero) (BBB/Negative/--) and significantly outweigh better upstream profits. The company faces selling price caps without the corresponding timely compensation paid by the government. While the sovereign rating anchors the rating on Pertamina, persistently high oil prices without timely compensation will rapidly dent the headroom under the 'bb+' stand-alone credit profile.

We now project Pertamina's 2022 EBITDA could fall to US$5 billion-US$6 billion under our current price deck of US$85 per barrel for Brent. This compares with more than US$7 billion under our previous price deck, with downstream losses possibly exceeding US$4 billion in 2022. The ratio of funds from operations to debt is heading toward 20% this year from our earlier forecast of about 30%. Downstream losses could rapidly snowball if prices stay well above US$100 per barrel for the rest of the year without timely compensation from the government.

The credit profiles are likely to remain intact on the Chinese national oil companies--China National Petroleum Corp. (CNPC; A+/Stable/--), China Petrochemical Corp. (A+/Stable/A-1) and its subsidiary, Sinopec, and China National Offshore Oil Corp. (CNOOC; A+/Stable/--) and its subsidiary CNOOC Ltd. (A+/Stable/--). This reflects their low financial leverage, increased upstream profits, and our assumption that the price of oil will eventually normalize.

Their refining operations will take a hit though. With crude oil about US$100 per barrel, the Chinese government may not allow adjustments in gasoline and diesel prices, leaving refiners bearing higher feedstock costs. At the same time, windfall taxes on high oil and gas prices will cap additional profit in their upstream business.

Neutral to positive 

EBITDA is likely to be 15%-25% higher than our previous forecast at:

• India-based Oil and Natural Gas Corp. Ltd. (ONGC; BBB-/Stable/--);
• Malaysia-based Petroliam Nasional Bhd. (Petronas; foreign currency: A-/Negative/--; local currency A/Negative/--); and
• Thailand-based; PTT Exploration and Production Public Co. Ltd. (BBB+/Stable/--).

This assumes the price of oil averages US$85 per barrel in 2022. The cash flow windfall is unlikely to lead to rating upgrade without a clear shift to more conservative financial policies and cuts to capital expenditure.

Our longer-term price assumptions, which we use for investment-grade issuers, are largely unchanged. For some entities such as ONGC and Petronas, the sovereign ratings also cap stand-alone credit profiles.

Rising prices are marginally positive for Indonesian oil and gas producer PT Medco Energi Internasional Tbk. (PT Medco; B+/Negative/--). EBITDA is about 10% higher than under our previous price deck, assuming the company closes its acquisition of a gas block, Corridor. Nearly 60% of the product base will be long-term fixed-price gas after the acquisition, which limits upside to profit from higher oil prices. The negative outlook continues to reflect tight cash flow adequacy ratios for the 'B+' rating level, and potential slippages in the Corridor asset acquisition.

PTT Public Co. Ltd. (BBB+/Stable/--) is the regional energy company most exposed to downstream operations, which account for nearly 30% of its EBITDA. Even so, we revised up its EBITDA by 10%-15% to Thai baht (THB) 389 billion-THB410 billion annually in 2022-2023, from THB391 billion in 2021. Under a rising oil price environment, the company will likely maintain its ample cash balance, and its debt-to-EBITDA ratio would be 2.0x-2.2x in 2022-2023.

How are rising oil and gas prices affecting chemical producers?

The effect is generally negative for profits. Average EBITDA of rated companies could be 10%-20% lower in 2022 than in 2021 because chemical price fluctuations trail feedstock price moves. Shanghai Huayi (Group) Co. (BBB/Stable/--) has limited rating headroom amid accelerating capital spending. Other entities had generally solid performances in 2021, creating financial headroom at current rating levels that could accommodate a 20%-25% fall in 2022 profits.

Such entities include Korea-based LG Chem Ltd. (BBB+/Positive/--) and Hanwha Total Petrochemical Co. Ltd. (BBB/Stable/--), and China-based Sinochem International Corp. (BBB+/Stable/--), Sinochem Hong Kong (Group) Co. Ltd. (A-/Stable/--), China National Chemical Corp. Ltd. (A-/Stable/--), China National Bluestar (Group) Co. Ltd. (BBB/Stable/--), and Wanhua Chemical Group Co. Ltd. (BBB/Stable/--).

The refining and chemical operations of India-based Reliance Industries Ltd. (BBB+/Stable/--) will likely see lower margins. This is due to input cost pressure in the refining and petrochemical businesses, and is partly offset by the upstream business benefiting from higher oil prices. However, given the company's significant deleveraging over the past two years, it has ample rating cushion. We forecast its ratio of debt to EBITDA to be well below 1.0x in 2022, against a downgrade trigger of 2.5x.

Refiners such as Thai Oil Public Co. Ltd. (BBB/Stable/--) and GS Caltex Corp. (BBB/Stable/A-2) are likely to face a similar situation, given the lag between crude oil price increases and the spread of refined petroleum products. Higher oil price volatility also heightens the risk of stock losses and a sharp fall in EBITDA if oil prices drop rapidly from current levels, as seen in 2014 across the region.

How will the manufacturing sector handle higher input prices?

In this sector, the situation tends to be issuer specific. Raw material or feedstock costs account for more than half of the total costs of tire manufacturer PT Gajah Tunggal Tbk. (B-/Stable/--) and animal feed producer PT Japfa Comfeed Indonesia Tbk. (BB-/Stable/--). For Gajah Tunggal, tight liquidity and governance considerations are the prime drivers of the 'B-' rating on the entity.

Nearly half of Japfa Comfeed's costs comprise agricultural commodities such as corn and wheat, whose prices have increased following the conflict. The company has a good record of passing through cost increases to customers, noting working capital is likely to increase in 2022 compared with our earlier base case.

Reducing the supply of specialty materials manufactured in Russia and Ukraine for the electronics and semiconductor sector is likely to lead to a spike in prices of products such as neon. But Taiwanese semiconductor and hardware makers such as Taiwan Semiconductor Manufacturing Co. Ltd. (AA-/Stable/--) and Hon Hai Precision Industry Co. Ltd. (A-/Stable/--) face solid demand dynamics and can pass through most cost increases. They also have significant net cash positions.

Tighter supply of commodities such as palladium could exacerbate the raw materials cost hike that the auto industry has been experiencing since last year. We believe most of the rated Chinese carmakers and suppliers can weather such adversities given sufficient headroom in leverage and profitability. The exception is Nexteer Automotive Group Ltd. (BBB-/Negative/--), which may see heightened rating pressure because of the potential for delayed margin recovery.

Will the mining sector get a ratings uplift?

Positive rating momentum for miners persists heading into 2022, especially for weaker rated issuers at the 'B' rating category. This includes PT Bayan Resources Tbk. (B+/Positive/--) in Indonesia, given windfall commodity profits. Vedanta's earnings will benefit from higher commodity prices, especially aluminum and oil. The company's oil business is relatively small at about 170,000 barrels of oil equivalent per day of production. At current prices, Vedanta's oil business has the potential to generate over US$1 billion in EBITDA in fiscal 2023, more than twice what it reported in fiscal 2021 and 25% higher than our estimate for fiscal 2022. While this improves sentiment toward underlying operations, the refinancing challenges faced by Vedanta and its July 2022 bond maturity remain the key rating driver.

Chinese metals and mining companies will continue to benefit from higher prices and generate strong operating cash flows. In our rated universe, we have a positive outlook on the ratings on Jiangsu Shagang Group Co. Ltd. (BBB-/Positive/--), Aluminum Corp. of China Ltd. (BBB-/Positive/--), and Zijin Mining Group Co. Ltd. (BB+/Positive/--). Our price assumption remains much higher than realized prices in 2020 and 2021, despite moderating prices in our base-case price deck in 2022-2024.

How are regional power utilities coping with higher input prices?

Energy infrastructure issuers are more at risk from higher energy prices than transportation infrastructure issuers. Ratings on Chinese power producers have been reflecting spiking feedstock and energy prices for a while, given the protracted supply and demand issues for coal. In our view, authorities will take measures to ensure sufficient coal supply and contain price hikes for major independent power producers.

The hit from rising liquefied natural gas (LNG) price volatility on the dollar margins of city distributors in China will be limited, for example on China Resources Gas Group Ltd. (A-/Stable/--) and Hong Kong and China Gas Co. Ltd. (A-/Stable/--). About 10%-15% of their gas supply comes from LNG, and this is mainly covered by long-term contracts. Hong Kong and China Gas has effective cost pass-through for its business in Hong Kong. These rated gas companies in Greater China have ample rating buffers.

Most rated energy utilities in South and Southeast Asia (SSEA) are regulated while most rated independent power producers in Indonesia and Thailand have well-established cost pass-through mechanisms. As a result, SSEA power producers are largely protected from increases in coal and gas prices.

However, the regulatory frameworks are diverse and there can be some timing gaps. Rated utilities such as Singapore Power Ltd. (AA+/Stable/--) in Singapore and NTPC Ltd. (BBB-/Stable/--) in India enjoy full cost pass-through on a timely basis. Other utilities in Malaysia, Philippines, and Thailand (including independent power producers) may be exposed to some timing difference in higher costs being passed on to the end customers; but there won't likely be any meaningful financial impact. In Indonesia, coal prices are capped for state utility PT Perusahaan Perseroan (Persero) PT Perusahaan Listrik Negara (BBB/Negative/--), limiting the hit on the utility and subsidy burden on the Indonesia sovereign.

How are higher fuel prices affecting the transport sector?

Negatively. Higher oil prices and the strength in the U.S. dollar are likely to compound the still slow activity of regional airlines in 2022. We do not have outstanding global scale ratings on airlines in Asia-Pacific.

The rated transport leasing companies in Asia-Pacific should be able to withstand operational disruptions caused by the escalating Russia-Ukraine conflict. This is because most of them have minimal direct exposure to the countries. Since most are also globally diversified, they can redirect their assets to other regions, in our view. The second-order hit from lower demand or credit quality of their customers may be more apparent for entities with weaker credit characteristics or which face refinancing risk. Examples of such firms are IBC Capital Ltd. (B-/Stable/--) and aircraft lessor Avation PLC (CCC/Developing/--). (see "Rated APAC Transportation Lessors To Withstand Russia-Ukraine Fallout," published March 4, 2022).

What is the direct exposure of rated companies in Asia-Pacific to Russia or Ukraine?

Very little. We estimate that less than 3% of about 520 publicly rated issuers in Asia-Pacific have some direct exposure to Russia through operations, assets, or sourcing.

Japan 

In Japan, Japan Tobacco Inc. (A+/Stable/A-1) and the large global trading and investment companies have a higher direct exposure to Russia through operations or assets. But they also have sufficient financial headroom to withstand operating disruptions and sanctions (see "Bulletin: Japanese Companies Exposed To Russia Have The Finances To Buffer Sanctions Hit," published Feb. 25, 2022, on RatingsDirect). Japan Tobacco, which gets about 15% of its profits from Russia, will maintain a debt-to-EBITDA ratio of about 1.0x from about 0.8x in 2021, thanks to a solid operating performance. That's well below our 1.5x threshold for a rating downgrade.

Mitsui & Co. Ltd. (A/Stable/A-1) and Mitsubishi Corp. (A/Stable/A-1) have investments in the resource sector in Russia but they represent less than 3% of assets for both companies. The entities will also maintain sufficient financial headroom under the 'A' credit rating, even assuming a one-time impairment of their Russian assets. The direct exposure to Russia of Itochu Corp. (A/Stable/A-1), Sumitomo Corp. (BBB+/Stable/A-2), and Marubeni Corp. (BBB/Positive/--) is well below 1% of their total assets.

China 

China's national oil companies and energy suppliers are among entities with the highest direct exposure to Russia, through sourcing relationships in oil and gas. CNPC has the largest exposure given it is the dominant importer of Russian oil and gas into China. All three national oil companies also have investments in Russia. CNPC has stakes in Yamal LNG and Arctic LNG 2 projects; CNOOC also has a stake in the Arctic LNG 2 project.

China Petroleum & Chemical Corp. (Sinopec; A+/Stable/--) has stakes in the Sibur gas-to-chemical project and the Taihu oil and gas project. Yet they only own minority stakes and capital allocation to these projects is generally limited (we estimate a maximum of 10% of noncurrent assets for CNPC; less than 5% for Sinopec and CNOOC).

Energy producers and suppliers Beijing Gas Group Co. Ltd. (A-/Stable/--) and Hero Asia Investment Ltd. (BBB+/Stable/--) also have direct exposure to Russia and Ukraine. Beijing Gas has a stake in an oil field in Siberia. Hero Asia has existing and future power production capacity in Ukraine. The contribution to consolidated profits of Beijing Gas is limited at about 10% (and 5% to that of its parent, Beijing Enterprise Group Co. Ltd.) and could face foreign-exchange volatility. We did not include production capacity in our financial forecasts of Hero Asia given the uncertainty on the timing of the commissioning of the project, which may be subject to physical risk.

Issuers in other sectors (real estate, manufacturing, consumer, technology and telecommunications, infrastructure, and power) either have domestic operations only, or the volume of their exports to Russia is immaterial. This includes rated local government funding vehicles in China.

South and Southeast Asia 

Very few rated companies in SSEA have direct exposure to Russia or Ukraine, or to clients in those countries. In our rated universe, the following companies have a slightly higher direct exposure. Financial headroom, rising earnings from commodity prices or the ability to redirect sales mitigate those risks and, as such, there will likely be no rating hit at this stage.

PT Medco generated about 10% of its oil and gas revenues from a subsidiary of LUKOIL PJSC, under a prepayment scheme. That reduces the risk of receivables outstanding. Medco can likely redirect the output to other commodity traders given the commoditised nature of the product.

India chemical producer Rain Carbon Inc. (B+/Stable/--) has about 9% of its revenues from Russia, along with some assets. The 'B+' rating has cushion due to the entity's solid performance in the past few quarters. We project a ratio of funds from operations to debt for Rain Carbon of 15%-18% in 2022, versus the downside rating trigger of 12%. Russia and Ukraine make up less than 2% of the revenues of fertilizer producer UPL Corp. Ltd. (BBB-/Negative/--), with no supply-chain dependencies on Russia.

Singapore-based aircraft lessor BOC Aviation Ltd. (A-/Stable/--) has about 4.5% of its aircraft book value leased out to Russian airlines. It has the financial capacity to absorb potential lost revenues from its Russian exposure while remaining comfortably above our downside rating trigger.

Issuers in sectors such as telecommunications, real estate, consumer products, retailing and light manufacturing in India, Indonesia, Singapore, or Thailand tend to be predominantly domestic with limited export revenues.

Korea and Pacific 

Rated entities in the Pacific are largely exposed to domestic operations. When they export, sales to Russia or Ukraine are immaterial. For example, agriculture chemicals producer Nufarm Ltd. (BB/Stable/--) generates less than 2% of its revenues from Russia. In Korea, large exporters also have limited dependency on Russia as a market. Korean chemical companies have some dependency on feedstock such as naphtha from Russia, but the product is widely traded globally (albeit at an increasing cost). We don't expect shortages to affect petrochemical production in the next six to 12 months.

Editing: Jasper Moiseiwitsch

Related Research

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• Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict, March 8, 2022
• South And Southeast Asia Oil Nationals To See Revenue Boost As Europe Looks East For Energy Supply, March 7, 2022
• China's Refiners Feel The Heat As Oil Nears US$130, March 7, 2022
• How The Conflict In Ukraine Is Affecting Financial Institutions Ratings, March 4, 2022
• Credit FAQ: The Significance Of Some Russian Banks Being Excluded From The SWIFT System, March 4, 2022
• Ratings Actions Waypoint: The Russia-Ukraine Conflict, March 4, 2022.
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• Research Update: Russia Ratings Lowered To 'CCC-' And Kept On CreditWatch Negative On Increasing Risk Of Default, March 4, 2022.
• S&P Global Ratings Raises Near-Term Oil And Gas Price Assumptions Following Russian Invasion Of Ukraine, March 1, 2022.
• The Macro And Credit Effects Of Russia’s Invasion Of Ukraine, Feb. 25, 2022.
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