TRIS Rating Co., Ltd. has assigned the rating of “BBB” to the proposed issue of up to Bt2,000 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed the company and current issue ratings of CK at “BBB” with “stable” outlook. The proceeds from the new debentures are for debt refinancing and future business expansion. The ratings reflect strengths in terms of the company’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in undertaking government infrastructure and specialized projects, and recurring income from concession investments. These strengths are partially offset by high financial leverage due to concession investments, backlog concentration, the inherent risk of fixed-price contracts, and the cyclical nature of the E&C industry.
The “stable” outlook reflects the expectation of a gradual improvement in CK’s operating margins and financial leverage over the medium term. The ratings could be improved should the company succeed in building a backlog that proves to enhance medium-term cash flows. In addition, a rating improvement requires a decrease in financial leverage and a demonstrated ability to sustain such improved capital structure over the medium term.
TRIS Rating reported that CK is one of the top three construction companies in Thailand. The company’s construction experience encompasses a broad array of construction activities, ranging from general civil work to highly sophisticated projects. A strong relationship with several leading foreign contractors also enhances its bidding competitiveness and construction techniques. At the end of 2010, CK’s project backlog was Bt28,339 million, of which 52% was the blue line train project and 28% was the purple line train project. In March 2011, CK added a small power plant project worth Bt4,550 million to its backlog. The backlog is expected to increase markedly should the company conclude the Xayaburi Hydroelectric Power project in Lao PDR worth approximately Bt76,000 million..
CK’s major asset investments include expressways, an underground mass transit, a water utility, and an electricity generation plant. At the end of 2010, the company held a 16.4% stake in Bangkok Expressway PLC (BECL), a 24.6% holding in Bangkok Metro PLC (BMCL), a 30% stake in Thai Tap Water Supply PLC (TTW), a 38% share of South East Asia Energy Co., Ltd. (SEAN), and a 95% share of Xayaburi Power Co., Ltd. (XPCL). CK reduced its holding in XPCL to 50% in March 2011. Recurring dividend income from BECL and TTW, at Bt500-Bt600 million per annum, helps reduce the effects of the cyclical construction industry. The Nam Ngum 2 project in Lao PDR undertaken by SEAN began generating revenue in 2011. BMCL’s unprofitable results and need for shareholders’ support continue to weigh on CK’s credit profile.
TRIS Rating said, CK’s financial profile in 2010 weakened considerably as the margin for the Nam Ngum 2 project was revised down. CK recognized additional project costs of Bt1,070 million in the first quarter of 2010. TRIS Rating expects CK’s funds from operations (FFO) to improve in the coming years as its bottom line will be driven more by projects secured after 2009 when competitive pressures and material prices were more normal than in 2008. The leverage level remains high from the debt-funded concession investments. Expected cash outflows for equity investments and capital expenditures should continue to limit the company’s efforts over the medium term to bring its leverage level down. At the end of 2010, the net debt to equity ratio stood at 2.45 times. The financial covenants call for the ratio not to exceed 2.5 times.
CK’s financial flexibility is meaningfully enhanced by an investment portfolio of sound marketable securities. At the end of 2010, the market value of CK’s investment portfolio was Bt14,570 million, assuming the value of SEAN at cost. The investment market value is expected to be higher should it reflect SEAN’s fair value. TRIS Rating expects the company to continue exploring alternatives to support its debt reduction efforts and future investments. -- End
Company Rating: Affirmed at BBB Issue Ratings: CK114A: Bt2,000 million senior debentures due 2011 Affirmed at BBB CK11OA: Bt1,000 million senior debentures due 2011 Affirmed at BBB CK122A: Bt1,616.2 million senior debentures due 2012 Affirmed at BBB CK126A: Bt1,400 million senior debentures due 2012 Affirmed at BBB CK13OA: Bt2,000 million senior debentures due 2013 Affirmed at BBB CK142A: Bt883.8 million senior debentures due 2014 Affirmed at BBB CK143A: Bt1,100 million senior debentures due 2014 Affirmed at BBB Up to Bt2,000 million senior debentures due within 2015 BBB Rating Outlook: Stable
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