Nan Ya Plastics Corp.

The stable rating outlook reflects our view that the Formosa Plastics (FP) group will maintain its improved profitability and cash flow at a satisfactory level over the next two to three years, supporting a ratio of funds from operations (FFO) to debt above 45%. The group's financial headroom should be sufficient to absorb potential market volatility during the period, as well as its anticipated large outlay at its shale gas-based chemical complex in the U.S. and other expansions over the next two to three years. We may lower the long-term rating on the core group members if the FP group's ratio of FFO to debt falls close to 45% for an extended period. Scenarios that could lead to this are:

...Materially improved debt leverage. FP group has lowered its financial leverage mainly through improved profitability and cash flow generation. This could sustain over the next two years and turn into sufficient financial headroom to help the group absorb potential volatility in the petrochemical market over a longer period. It could also fund the group's core and potential non-core investments as well as its upcoming large investment in the U.S., while still keeping the group's ratio of funds from operations (FFO) to debt consistently above 45% throughout business cycles. Large investment plan in the U.S. The FP group is likely to increase its long-term capital expenditure after 2019, to support significant expansion in the U.S. The group plans to build a shale gas-based chemical complex in Louisiana, costing more than US$10 billion in two phases during 2019-2026. This project along with constant expansion in Asia could increase the group's debt leverage; however, the investment could also...

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