TRIS Rating has assigned the rating of “BB+” to the proposed issue of up to Bt1,000 million in unsecured subordinated perpetual debentures of Ananda Development PLC (ANAN). At the same time, TRIS Rating has affirmed the company rating and the ratings of senior unsecured debentures of ANAN at “BBB” as well as the rating of ANAN’s existing unsecured subordinated perpetual debentures (hybrid debentures) at “BB+”. The outlook remains “stable”.
The rating of ANAN’s hybrid debentures is two notches below the senior unsecured debenture ratings of ANAN. This rating differential reflects the subordinated nature of the hybrid debentures and the option of the issuer to defer coupons on a cumulative basis. If the interest deferral provision is exercised, ANAN will be prohibited from making any dividend payments to any class of equity holder.
The proposed hybrid debentures have an “intermediate” equity content. Thus, TRIS Rating would treat 50% of the principal amount of the debentures as equity and the other 50% as debt when calculating ANAN’s financial ratios. The “intermediate” equity content will fall to “minimal” (or 0% equity treatment for this issue) at the end of the fifth year from the issuance date since the remaining effective tenor of the issue will be less than 20 years. ANAN also has a call option to redeem the issue after the five-year non-call period ends or if certain redemption events occur. Except for certain events as specified in the terms and conditions, ANAN intends to replace redeemed or repurchased hybrid debentures with an instrument that has similar or higher equity content.
The ratings of ANAN and its existing issues continue to reflect the company’s improved operational profile in terms of larger revenue base, more contribution from the low-rise housing segment, and the expected higher contribution of share profits from its investment in joint venture (JV) projects. The ratings also reflect ANAN’s strong market competitiveness in the condominium segment and its proven track record in the residential property market. However, the company’s high concentration on the condominium segment and its high level of financial leverage remain the key concerns. The ratings also take into consideration the relatively high level of household debts nationwide coupled with the slowdown in the domestic economy which may impact the demand in the housing market in the short to medium term.
The “stable” outlook reflects the expectation that ANAN will be able to sustain its operating performance at the target levels. Over the next three years, ANAN’s revenue is expected to be in the range of Bt10,000-Bt13,000 million per annum. The company is expected to keep funds from operations (FFO) at Bt1,200-Bt1,500 million per year while maintaining adjusted debt to capitalization ratio at no more than 66%, or the interest-bearing debt to equity ratio below 2 times.
ANAN’s ratings and/or outlook could be revised downward should its operating performance and/or financial profile significantly deteriorate from the target levels. Also, the debt to capitalization ratio at above 66% for certain periods will lead to the downward revision. The rating upgrades are unlikely in the near term. However, if the company’s operating performance improves significantly from the current level while its adjusted debt to capitalization ratio could be kept lower than 60% on a sustainable basis, these factors would be positive for ANAN’s ratings.
ANAN is engaged in development and sale of residential property, mainly condominium projects located near mass transit train stations in Bangkok. The company was established in 1999 by the Ruangkritya family, and then listed on the Stock Exchange of Thailand (SET) in December 2012. As of March 2016, Mr. Chanond Ruangkritya was ANAN’s largest shareholder, holding 50.1% of the shares.
ANAN’s business risk profile is improving. The operating performances of the company and its JVs have been relatively strong over the past few years. Revenue from its own projects improved from around Bt5,000 million per year during 2011-2012 to around Bt10,000 million per year during 2013-2015, while its JVs with SEA Investment Five Pte. Ltd. (SEAI5), a subsidiary of Mitsui Fudosan Group, (51:49) to develop condominium projects will start to realize profits in 2016 and onwards. As of February 2016, combined project values under JVs were around Bt46,000 million. The JVs not only enhance ANAN’s capacity to expand the project portfolio but also help mitigate the business and financial risks of ANAN.
ANAN’s financial profile is fair. Total revenue during 2014-2015 was around Bt10,000 million per annum, in line with TRIS Rating’s expectation. Over the next three years, ANAN’s total revenue is expected to range from Bt10,000-Bt13,000 million per annum. Additionally, income from project management services and commission fees through the JV projects will contribute a greater portion of total revenue from 2016 onwards.
ANAN’s operating margin, as measured by operating income before depreciation and amortization as a percentage of revenue, improved to 16% during 2012-2013 and 19% during 2014-2015 as its condominium projects generated more profit margins. Going forward, ANAN’s operating margin is expected to stay at around 15% over the next three years. The net profit margin during the next three years is expected to improve as ANAN will start recognizing share profits from its JV projects from mid-2016.
The debt to capitalization ratio (including the adjustments with proportionate debt from JVs and the subordinated capital debentures) was 55% as of December 2014 and 60% as of December 2015. TRIS Rating’s base case scenario assumes ANAN’s financial leverage over the next three years will remain high from its business expansion through its own and JV projects. However, the debt to capitalization ratio should not exceed 66%, or the interest-bearing debt to equity ratio should be less than 2 times. ANAN’s liquidity profile is acceptable. Its senior unsecured debentures worth Bt2,395 million, Bt4,000 million, and Bt2,000 million will mature in 2016, 2017, and 2018, respectively. ANAN’s liquidity sources include Bt2,500 million in cash, Bt4,700 million in undrawn unconditional credit facilities as of December 2015, and expected FFO of around Bt1,200-Bt1,500 million per annum.
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