OREANDA-NEWS.  Fitch Ratings has assigned CPC Corporation, Taiwan's (A+/AAA(twn)/Stable) TWD13.3bn senior unsecured bonds National Long-Term ratings of 'AAA(twn)'.

The bond issue is split into three tranches as follows:
TWD7.5bn 1.30% 104-1-A bond due 2020
TWD3.0bn 1.55% 104-1-B bond due 2022
TWD2.8bn 1.80% 104-1-C bond due 2025

The bond proceeds are to be used to fund the issuer's ongoing capex programme and to improve its debt maturity profile. The five-year tranche has a bullet repayment at the end of the fifth year; the seven-year tranche will be repaid over two equal instalments in the sixth and seventh years; and the 10-year tranche will be repaid over two equal instalments in the ninth and 10th years.

The bonds are rated at the same level as CPC's National Long-Term Rating as they constitute direct, unconditional and unsecured obligations of the company.

KEY RATING DRIVERS
Credit Linked to Sovereign: The ratings of CPC are equalised with Taiwan's sovereign ratings (Long-Term Foreign Currency IDR: A+/Stable; Long-Term Local Currency IDR: AA-/Stable) because of its very close linkage to the sovereign. Although there is no explicit guarantee from the sovereign, which is also the case for other Taiwanese government-owned companies, the operational and strategic ties between CPC and the state are strong.

Fully Controlled Policy Vehicle: In Fitch's opinion, the Taiwanese government uses CPC as one of its essential public service vehicles. CPC has a public service obligation to provide adequate natural gas, petrochemical products, and refined oil products to the Taiwanese economy. CPC acts as an important policy tool of the government in keeping oil product prices below market prices to combat inflation.

Privatisation Not a Near-Term Prospect: Privatisation is unlikely within the next four years unless CPC obtains consent from the government and its labour union to kick-start the process, which are not expected to materialise in the near term. Privatising CPC would require the government to find another platform or mechanism to perform oil and gas related public services and to influence the domestic prices of refined oil products.

Financial Fundamentals Weak: CPC's standalone creditworthiness is constrained by its policy tool status. It posted an EBITDA loss of TWD970m in 2014. The EBITDA loss was largely due to the government controls on refined oil product prices, which prevented CPC from passing on rising costs to end-users, and inventory losses due to the oil price rout in 2H14. Fitch expects the company's cash generation capacity to remain low in the short to medium term and its EBITDA margin at around the low single digits, assuming global oil prices move in line with Fitch's oil and gas price deck.

Capex and Acquisition Plan: Another constraint on CPC's standalone credit profile is its capex and acquisition plan. CPC plans to expand its refining, petrochemical and other mid-stream related facilities as well as acquire upstream oil and gas interests. Fitch expects its total capex and acquisition spending for 2015-2016 to be TWD50bn-55bn.

Dominant Player in Taiwan: CPC's standalone credit profile is supported by its strong market position. It is the only integrated oil and gas company in Taiwan, although its upstream operation is insignificant. CPC's market share in refined oil products is about 80%, and the company is the only natural gas importer in Taiwan.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil prices average USD55/bbl in 2015, USD65/bbl in 2016, and USD80/bbl in 2017 and in the long term in line with the Fitch oil and gas price deck
- Taiwan's GDP to expand by 3% in the short to medium term
- Capex of TWD95bn-100bn in 2015-2018
- No dividend payout
- No IPO in the short term.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-Negative rating action on the Taiwan sovereign
-Significant weakening of linkages between CPC and the sovereign (such as privatisation)

Positive: Future developments that may, individually or collectively, lead to positive rating action, include
-Positive rating action on the Taiwan sovereign

For the sovereign rating of Taiwan, the following sensitivities were outlined by Fitch in its
Rating Action Commentary of 18 July 2014:

The main factors that could lead to a positive rating action, individually or collectively, are:
- Increased confidence that the ratio of gross general government debt to GDP is on a firm downward trend over the medium term, most likely driven by a combination of stronger GDP growth and fiscal consolidation.

The main factors that could lead to a negative rating action, individually or collectively, are:
- A swift deterioration in the banking sector's asset quality, in light of the macro-prudential risks stemming from real estate and rising China exposure.
- Adverse macroeconomic or financial shocks, either domestic or exogenous, that significantly slow the economic recovery, adversely affecting the public finances and the financial sector.