Moody’s also withdrew the Ba2/LGD 3 (40 percent) rating assigned to SIP’s senior secured ABL revolving facility following the termination and cancellation of the facility effective Oct. 5 2010.

Moody’s said that the upgrade of SIP’s ratings reflects the recent improvement in financial profile reported by the company thanks to the substantial and constant financial support provided by its parent Saudi Basic Industries Corporation (SABIC: A1, stable) in parallel with a sustained recovery in its operating performance driven by more benign trading conditions and benefits accruing from self-help initiatives.

In the past two and a half years, SABIC has explicitly demonstrated its unwavering commitment to its 100 percent-owned subsidiary by providing significant financial support to SIP in the face of the challenging operating environment that has affected the polycarbonate sector as a result of heightened input cost inflation and subsequently very depressed demand conditions resulting from the global economic downturn.

During the period, SABIC has made significant capital contributions to SIP including a mix of equity, subordinated PIK notes and more recently subordinated floating rate notes. This intercompany funding has ensured that SIP timely met all its financial obligations, including the financial covenants set out in its bank credit facilities, at all times. This has also allowed the partial prepayment of the secured term loans and unsecured bond raised by SIP to finance the acquisition from General Electric in 2007, which has led to a 45 percent cut in external borrowings from an initial level of $8.1 billion. Recently, SIP has also used funds advanced by its parent to repay in full outstandings under its $1 billion senior secured ABL revolving facility. This facility has now been terminated and replaced by a 3-year senior unsecured committed facility of the same amount provided by SABIC Capital I B.V., which is in line with SABIC’s policy of centralizing its international liquidity funding through this entity.

The ongoing refinancing of SIP’s debt and recalibration of its capital structure has allowed SIP to bring leverage back to a more manageable level relative to expected future operating profitability and cash flow generation. Looking ahead, Moody’s believes that SABIC will continue to demonstrate its full commitment to SIP and take further initiatives to enhance the financial flexibility of its subsidiary. In this context, it is expected that further refinancing of SIP’s external debt with intercompany funding will take place over time.

At the same time, Moody’s notes that the operating performance of SIP and its financial results have shown some significant improvement over the past twelve months following the severe downturn experienced by the group in its main end-user markets such as housing, construction, automotive and consumer electronics in 2008/ early 2009. Notably, the recovery in demand that commenced in H2 2009, gathered significant momentum in H1 2010 reflected in a strong rebound in capacity utilization and sales volumes, particularly in the US market, and a marked pick-up in core product sales prices. This has led to continuing improvement in operating profitability with EBITDA margins lifted to the mid to high teens.

Looking ahead, the benign trading conditions that have prevailed within the polycarbonate sector in the first half of 2010 may not prove sustainable as raw material cost pressures resurface fueled by stronger oil prices. However, SIP’s underlying operating profitability should be underpinned by the savings achieved through the restructuring action implemented in the past two years, which has helped trim the company’s fixed cost base and resulted in a headcount reduction in excess of 1,000 employees.

The outlook is stable reflecting Moody’s expectation that further refinancing of SIP’s external debt in parallel with a sustained recovery in the company’s underlying operating performance and financial results, will support the recent improvement in SIP’s stand-alone credit profile.

Upward pressure on the Ba1 CFR may arise should the stand-alone financial profile of SIP further strengthen underpinned by a sustained improvement in operating results in parallel with further deleveraging in the context of the ongoing refinancing of the company’s external debt, which would help position net debt (excluding subordinated PIK parent notes) to EBITDA below 4.5 times on average throughout the cycle.

Conversely, SIP’s CFR could be downgraded should renewed weakness in internal cash flow generation in the absence of further deleveraging of the company’s capital structure lead net debt (excluding subordinated PIK parent notes) to EBITDA to rise above 6.0 times on average throughout the cycle.

The Baa3 and LGD assessment of LGD 2 (26 percent) assigned to the senior secured term loan facility reflects the significant protection afforded by a comprehensive collateral package supporting this facility as well as the sizeable layer of subordinated intercompany debt recently injected in SIP’s capital structure. The Ba2 and LGD assessment of LGD 5 (72 percent) assigned to the senior unsecured notes reflects the existence of substantial senior secured bank facilities ranking ahead of the notes, which however rank ahead of the various subordinated shareholder’s loans.

Moody’s last rating action on SIP was the confirmation of its ratings on 27 March 2008.

The principal methodology used in rating SIP was the Global Chemical Industry published in December 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody’s website.

Incorporated in The Netherlands, SABIC Innovative Plastics Holding B.V. is a global leading manufacturer of engineering thermoplastics. The group had total revenues of $5.4 billion in the fiscal year ended 31 December 2009.