TRIS Rating Co., Ltd. has assigned the rating of “BBB’’ to the proposed issue of up to Bt3,000 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has also affirmed the company and current senior debenture 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, 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 over the medium term. The ratings could be upgraded 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 June 2011, CK’s project backlog was Bt31,927 million, of which 43% was the blue line train project (two contracts) and 19% was the purple line train project. The backlog is expected to increase markedly should the company conclude the Xayaburi hydroelectric power project in Lao PDR worth approximately Bt76,000 million.
TRIS Rating said, the major asset investments of CK include expressways, an underground mass transit, a water utility, and an electricity generation plant. At the end of June 2011, 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 17.7% share of South East Asia Energy Co., Ltd. (SEAN), a 50% share of Xayaburi Power Co., Ltd. (XPCL), and a 49% share in CK Power Ltd. (CKPL). CK reduced its holding in CKPL to 38% in September 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.
CK’s financial profile remains under pressure by high leverage which reflects the company’s 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 June 2011, the net debt to equity ratio stood at 2.6 times. The financial covenants call for the ratio not to exceed 3.0 times.
CK’s performance in construction business continues to fall short of expectation. For the first half of 2011, operating margin before depreciation and amortization was -5.1% due to cost revisions in certain projects. Funds from operations (FFO) was contracted by Bt714 million. Nonetheless, CK’s financial flexibility is supported by an investment portfolio of sound marketable securities. In June 2011, CK sold 20.3% of its shares in SEAN to CKPL for a total of Bt3.35 billion. CK received Bt1.7 billion in cash and booked Bt1.65 billion as receivables. CK intends to divest the remaining stakes in SEAN worth Bt2.9 billion to CKPL within a year. The whole transaction is expected to generate a large sum of cash inflows for CK and help alleviate pressure on leverage to some extent. However, this will need to be considered together with CK’s investment plans to assess its net positive effect on the credit ratings, said TRIS Rating. -- End
Company Rating: Affirmed at BBB Issue Ratings: 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 CK154A: Bt2,000 million senior debentures due 2015 Affirmed at BBB Up to Bt3,000 million senior debentures due within 2018 BBB Rating Outlook: Stable
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