TRIS Rating Co., Ltd. has downgraded the company and current issue ratings of Italian-Thai Development PLC (ITD) to “BBB-” from “BBB”. At the same time, TRIS Rating has also revised the rating outlook of ITD to “negative” from “stable”. The rating actions reflect the significantly deterioration in the company’s financial profile, accentuated by net losses for the past six consecutive quarters. ITD’s relatively high financial leverage, coupled with its inadequate operating profit and high financing expenses weakened the company’s balance sheet and has constrained its financial flexibility. The “negative” outlook also reflects TRIS Rating’s concern over the company’s ability to comply with a key financial covenant, the net debt to equity ratio, in its bond indenture and in its bank facilities. Under its financial ratio covenant, the company has to maintain the net debt to equity ratio at no more than 2.5 times. The next test date for the covenant is at the end of the second quarter of 2012.
The “BBB-” ratings reflect ITD’s leading market position in Thailand, its large and diverse project backlog, broad product line, geographic diversification, and proven records in undertaking both government infrastructure projects and specialized projects. However, these strengths are partially offset by ITD’s aggressive investment strategy and high financial leverage. ITD also has an elevated business risk profile due to the large investments it has made in several concession projects. The “negative” outlook reflects ITD’s weakening financial profile and its susceptibility to a breach of financial ratio covenant. Given that the outlook is “negative”, it is unlikely that the company’s ratings will be upgraded in the near term. The ratings for ITD could experience further downward pressure, should the company breach its financial covenants or if its financial profile deteriorates further. The outlook could be revised to “stable” should the operating and financial profile improve.
TRIS Rating reported that ITD is Thailand’s largest construction contractor. Its leading market position is supported by a strong track record, good relationships with both private and public sector clients, self-sufficiency in key raw materials, an extensive machinery and equipment fleet, and an adequate supply of skilled labor and engineers. ITD’s total revenues in 2011 were Bt44,247 million. The company operates nine business divisions, three foreign branches (in Taiwan, the Philippines, and India), and eight foreign subsidiaries in the Asian region. ITD has also diversified into the production of construction materials, such as steel, concrete fabrications, and cement. In addition, ITD has entered the concession business. Currently, the company was granted four concession projects: a potash mining in Thailand, a deep seaport and industrial estate in Myanmar, a toll road in Bangladesh, and a bauxite mining in Lao PDR.
TRIS Rating said, as of 1 March 2012, ITD’s backlog was Bt128,109 million, including awarded projects but awaiting contract signings. The group backlog (including backlog of overseas subsidiary) reached Bt164,381 million, representing 3.7 times the level of revenue in 2011. Around 65% of the group backlog was from overseas projects, mainly in India and Bangladesh. Although ITD’s group backlog was high, approximately 26% of backlog was in long-term projects, and 36% was in projects for which the start dates had been postponed, thereby, delaying revenue and cash flow recognition for ITD.
ITD’s operating performance in 2011 was weaker than TRIS Rating’s expectation. The company reported a net loss of Bt1,698 million in 2011 and Bt171 million in the first three months of 2012. The net losses were mainly due to high operating and interest costs which were approximately 10% of total revenue and far exceed the operating margin. ITD’s funds from operations (FFOs) dropped from a normal level of more than Bt1,000 million per year to just Bt578 million in 2011 and Bt214 million in the first three months of 2012. The FFOs were not sufficient to finance ITD’s capital expenditures and investments in new ventures. As a result, leverage has gradually increased. TRIS Rating expects that ITD’s financial leverage will remain high in the intermediate term. The company will need more working capital as construction activity rebounds. In addition, ITD’s capital expenditure plans, plus its objectives to make equity investments in concession projects, could derail its effort to reduce debt.
As of March 2012, ITD’s debts stood at Bt27,674 million, rising by Bt3,557 million from December 2011. Debt rose as working capital needs increased. The total debt to capitalization ratio as of March 2012 climbed to 75.6%, from 73.1% in 2011. The net debt to equity stood at 2.86 times in March 2012, which was higher than the ratio of 1.5 times to 2.5 times, and 2.5 times stipulated in its bank credit facilities and bond covenants, respectively. The covenant for the bank credit facilities is tested at the end of each quarter, while the bond covenant is tested at the end of accounting period in the second and the fourth quarter of each year. On 11 May 2012 and 14 May 2012, the company received waivers from banks for its breach of a financial covenant at the end of March 2012. A risk of a financial ratio covenant breach for the next test date is relatively high. However, ITD has many alternatives to raise fund, such as selling some of its investments or raising more capital via a rights offering. On 27 April 2012, the company received approval from its shareholders to increase registered capital from Bt4,193.68 million to Bt5,871.15 million by issuing the new ordinary shares under a general mandate. Whichever alternatives the company chooses, cash inflow is expected to enhance its liquidity profile, said TRIS Rating. — End
Company Rating: Downgraded to BBB- from BBB Issue Ratings: ITD139A: Bt1,500 million senior debentures due 2013 Downgraded to BBB- from BBB ITD146A: Bt5,000 million senior debentures due 2014 Downgraded to BBB- from BBB ITD159A: Bt1,000 million senior debentures due 2015 Downgraded to BBB- from BBB ITD166A: Bt3,500 million senior debentures due 2016 Downgraded to BBB- from BBB Rating Outlook: Negative from Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.