Thai Rating and Information Services Co., Ltd. (TRIS) announced Thursday 28 December 2000 that it has assigned "BBB+" ratings to the senior secured debentures SCON047A and SCON061A of Seacon Development Co., Ltd. (SEACON). The ratings reflect the adequate collateral value of SEACON's shopping center, its high quality retail property and its flexible management strategy. These strengths are partially offset by a high concentration risk because the company has only one income producing property. The ratings also incorporate the company's rather weak but sufficient cash flow protection and intensifying competition in the retail industry, especially the aggressive expansion of modern trade outlets owned by big foreign operators.
TRIS reported that SEACON's two debentures are secured by the company's shopping center, which according to American Appraisal (Thailand) Ltd. had, as of September 2000, a fair market value of Bt3,750 million. The debentureholders are adequately protected due to a quite low loan to collateral value of 33%, which includes a Bt50 million overdraft facility. The issue ratings also reflect that in case of the occurrence of events of default, the secured debentureholders have the right to direct access to the rental and service income from shopping center tenants. However, in the case of a default, TRIS is concerned about the illiquidity of the collateral.
SEACON was incorporated in 1990 as a 68:32 joint venture between the Sosothikul family and five financial institutions to develop and operate Seacon Square Shopping and Entertainment Center. This shopping center is in a good location and has a strong, diversified tenant base including major anchors. The rental and service income from the largest tenant is less than 6% of total rental and service income, and the top-10 tenants contribute 23% of total rental and service income. However, asset quality is partially offset by high concentration risk: the company has only one income producing property. SEACON's management team comprises young executives with the flexibility to adjust the company's strategy to compete in a rapidly changing environment. During the economic crisis, management worked to better utilize its commercial area by expanding its customer base to include lower income customers. The success of the strategy is evident in the company's improved occupancy rate over the past five years. Competition in the retail industry is intense, especially from discount stores, which have been aggressively launching new outlets in the market over the past few years and are expected to launch many new projects in the future. The operators of shopping centers have had to readjust their strategies rapidly to compete.
SEACON's financial profile is characterized by average profitability and rather low but sufficient cash flow protection. However, it will very likely need external sources of funds of approximately Bt275 million to Bt300 million in the first quarter of 2006 to repay the final principal repayment on SCON061A as its internal cash generation will not be sufficient in that year. The company's pretax returns on permanent capital have been quite low, 3.34% to 5.70%, during the past four years. However, operating income before depreciation and amortization as a percentage of rental and service income and sales increased from 30% in 1996 to 41% in 1999. As a result of high debt and interest burdens, funds from operation-to-total debt and earnings before interest, tax, depreciation and amortization (EBITDA) coverage ratios have been rather low, below 7% and 1.35 times respectively, in the past four years. The company's total debt to capitalization ratios improved from 37% in 1997 to 33% in 1999 as a result of continuous reductions in its debt burden.
Seacon Development Co., Ltd. (SEACON) Issue Rating SCON047A: Bt650 million senior secured debentures due 2004 BBB+ SCON061A: Bt550 million senior secured debentures due 2006 BBB+
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