TRIS Rating has assigned the rating of “A-” to the proposed issue of up to Bt1,000 million in partially guaranteed debentures of Energy Absolute PLC (EA). Also, TRIS Rating has assigned the rating of “AA” to EA’s proposed issue of up to Bt7,000 million in guaranteed debentures which are fully guaranteed by Siam Commercial Bank PLC (SCB). SCB is rated “BBB+” by S&P Global Ratings and “Baa1” by Moody’s Investor Service (Moody’s). At the same time, TRIS Rating has affirmed the company rating of EA at “BBB+”. The outlook remains “stable”. The assigned issue ratings replace the rating of the proposed issue of up to Bt8,000 million announced on 16 June 2016 as the company decided to change the guaranteed portion of its debentures. The proceeds from the new debentures will be used mainly to refinance EA’s debts while the remainder will be reserved for its working capital needs.
Under the guarantee’s terms and conditions, SCB provides an irrevocable and unconditional guarantee to cover 65% and 100% of the principal and the interest payments for the obligations of the rated partially guaranteed debentures and the guaranteed debentures, respectively. The ratings of EA’s guaranteed debentures are based on the credit worthiness of its guarantor, SCB, and that its guarantee obligations rank at least pari passu with all other present and future unsecured and unsubordinated indebtedness of SCB.
SCB’s credit profile is supported by its strong market position as the third largest commercial bank in Thailand with a 17% market share in loans and an 18% market share in deposits as of March 2016. SCB has strong operating network nationwide, diversified income, and sound and experienced management team. The rating of SCB also reflects a high likelihood of government support based on the bank’s high systemic importance in Thailand. SCB’s credit profile is however partly constrained by intensifying competition in the banking industry and challenging economic outlook in Thailand.
For the partially guaranteed debentures, the rating also reflects the credit profile of EA. The credit strength of EA reflects the predictable cash flows of EA’s solar power projects which have the long-term power purchase agreements (PPAs) with the Electricity Generating Authority of Thailand (EGAT) and the Provincial Electricity Authority (PEA), and EA’s position as one of the leading producers of biodiesel (B100) in Thailand. However, the ratings are constrained by construction and operational risks associated with the wind power projects, EA's limited track record as a power producer, and its highly leveraged balance sheet.
The “stable” outlook for EA’s company rating reflects TRIS Rating's expectation that EA’s solar plants will generate the predictable cash flows as planned, with solar performance ratio above 79% and the successful execution of the two wind power projects to earn satisfactory returns. The rating assumes EA will secure additional equity funding if it chooses to make any sizable investments. A rating upgrade would be unlikely during the construction of the wind projects. However, the rating upside case could develop if the performance of the wind projects proves consistently above our expectations. On the contrary, we could lower the rating if EA’s solar or wind projects do not meet their performance targets, or its capital structure deteriorates markedly as a result of the failure to generate sufficient cash flows or aggressively debt-funded investments.
The ratings and outlooks for EA’s guaranteed debentures solely reflect the creditworthiness of its guarantor, SCB, which has current international scale company ratings of “BBB+/Stable” from S&P Global Ratings and “Baa1/Stable” by Moody’s. The rating and outlook for EA’s partially guaranteed debentures reflects both creditworthiness of SCB (guarantor) and EA (issuer), and could be revised should there be any changes in the credit profile of either SCB or EA.
Established in 2006, EA was previously known as Suntech Palm Oil Ltd. before changing its name to Energy Absolute PLC in 2008. Up until 2012, EA’s core business was to manufacture and sell biodiesel products. However, in late 2012, EA expanded the business into renewable energy generation through the development of solar and wind power projects. EA was listed on the Market for Alternative Investment (MAI) in 2013. As of March 2016, Mr. Somphote Ahunai was the major shareholder, holding approximately 43% interest in EA.
The company has a total contracted capacity of 664 megawatts (MW) covering 278 MW of four solar projects currently operating, and another 386 MW from two wind projects under construction. The full-year performance of EA's power business in 2015 was contributed from the solar projects in Lopburi, Nakornsawan, and Lampang provinces. These solar operations accounted for more than 90% of the company’s total earnings before interest, tax, depreciation, and amortization (EBITDA) of Bt4.1 billion for 2015.
The performance of EA’s solar projects was satisfactory. Since inception, the actual annual output of all solar plants has exceeded their initial estimates based on a 90% probability (P90) of energy production by 11% on average. For biodiesel segment, EA has the established position in the B100 market in Thailand. EA's biodiesel business has showed steady improvements in capacity utilization and profitability, with its EBITDA reaching Bt560 million in 2015.
The ratings are constrained by the inherent risks of the company's wind power projects currently under construction. The first wind project called Hadkunghan (HKH), located in Nakornsithammarat and Songkla provinces, with a contracted capacity of 126 MW. The second wind project called Hanuman (HNM), located in Chaiyaphum province, with a contracted capacity of 260 MW. HKH and HNM are expected to commence operations by mid-2016 and 2018, respectively. Compared to a solar power project, a wind power project carries higher execution risks such as installation risk of key components and construction difficulty that can lead to cost overrun or project delay. In addition, the operational risks of a wind farm project are higher. Actual wind speeds may deviate significantly from expectations reducing power output, and the project’s cash flows.
EA has a highly leveraged balance sheet as Its power projects employ project financing. Due to the large-scale investment and the progress of the development in each project, EA’s total debt to capitalization ratio steadily escalated from 58.2% at the end of 2013 to 72.3% at the end of 2015, and 71.4% at the end of March 2016. The high level of leverage is partly offset by stable and predictable cash flows produced by solar projects.
TRIS rating’s base-case scenario expects EA’s operating margin to stay in the range of 50%-55% during 2016-2019. The gradual improvement of the margin is from the higher contribution of power projects which generate the better margin than the biodiesel business. Within the power business, the wind projects will earn lower margins than the solar projects because the wind projects have a lower tariff adder rate while incurring higher operating expenses. EA's total EBITDA is expected to double in the next four years when the wind projects are all up and running, and the total power capacity in operation reaches 664 MW. However, the total EBITDA is forecasted to gradually decline from 2023 onwards as the adder scheme starts to expire. Looking forward, EA’s total debt to capitalization ratio is expected to improve gradually toward the range of 60%-65% when all the power projects are up and running and performing as expected. During 2016-2019, the company’s funds from operations (FFO) to total debt are expected to hold at 15%-20%.
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 2016, 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, without the prior written permission of TRIS Rating Co., Ltd. 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.