CreditNews Announcement No. 247
Date of Announcement: 28 January 2004
SIAM DR COMPANY LIMITED
Issue Rating:
Bt4,000 million depositary receipts on Bangchak Petroleum PLC's subordinated convertible debentures due 2014 AA
TRANSACTION SUMMARY
Issuer: Siam DR Co., Ltd.
Legal Structure: SIAMDR is established specifically to issue depositary receipts linked to the underlying securities issued by the underlying issuer.
Underlying Issuer: Bangchak Petroleum PLC.
Underlying Securities: BCP's subordinated convertible debentures.
Securities Rated: Bt4,000 million depositary receipts on BCP's subordinated convertible debentures due 2014 (BCP-DR2) -- issued to purchase the subordinated convertible debentures from the underlying issuer.
Securities Structure: Depositary receipts linked to underlying securities.
Credit Support: Principal protection for the BCP-DR2 is provided by the Ministry of Finance.
Registrar: Thailand Securities Depository Co., Ltd.
RATIONALE
The "AA" rating is assigned to the proposed Bt4,000 million depositary receipts on Bangchak Petroleum PLC's (BCP) subordinated convertible debentures (BCP-DR2) of Siam DR Co., Ltd. (SIAMDR). The rating* reflects (1) credit support in terms of principal protection provided by the Ministry of Finance (MOF) to buy back the BCP-DR2 at the original offering price should BCP be unable to make timely scheduled payments, (2) the underlying issuer's credit quality, and (3) the additional security elements embedded into the transaction structure itself.
(* The "AA" rating assigned by TRIS Rating represents our evaluation of the likelihood of timely payment of interest and ultimate payment of principal on the rated depositary receipts as scheduled under the terms of the applicable transaction documents. TRIS Rating's structured finance ratings are intended to be directly comparable to other ratings assigned by TRIS Rating.)
BCP's credit quality is derived from its position as an oil refining and marketing company operating with high financial leverage compared with TRIS Rating's financial ratio benchmarks. The company also has underutilized marketing business assets (i.e. its network of service stations) in a risky industry characterized by competitive pressures from domestic and regional supply-demand imbalances, cyclicality along the economic cycle, and unpredictable earnings due to oil price fluctuations. These weaknesses are being mitigated partly by a corporate and financial restructuring program with assistance from the government, and stronger oil demand stemming from the continuing economic recovery.
Prior to its corporate and financial restructuring program, BCP has encountered weak operating and financial performance since the 1997 economic crisis. To alleviate BCP's difficulties, the cabinet resolved on 8 July 2003 to require BCP to undertake a corporate and financial restructuring program. The corporate restructuring aims to improve efficiency in both the refining and marketing businesses to enhance cash from operations. Cash flow protection and profitability will improve if the restructuring program meets its goals.
The main purpose of the financial restructuring is to lower BCP's financial leverage. BCP's capital structure will change from its current debt level of Bt19,500 million in loans and debentures to Bt12,500 million in permanent working capital and long-term loans from financial institutions, Bt3,000 million in common stock, and Bt4,000 million in 10-year subordinated convertible debentures. The financial restructuring could lead to lower leverage. In addition to its corporate and financial restructuring program, reduced competitive pressures in the industry arising from domestic and regional economic recoveries would also boost BCP's competitiveness and earnings in the medium term.
According to the financial restructuring program, the BCP-DR2 will be issued to bolster BCP's corporate and financial restructuring program under the government's support. According to the program, the BCP-DR2 will be one of two issued securities: BCP-DR2 and depositary receipts on BCP's common stock (BCP-DR1). In order to fund part of BCP's financial restructuring program, BCP-DR1 and BCP-DR2 will be issued by SIAMDR to buy BCP's common stock and subordinated convertible debentures, respectively. SIAMDR is established and owned by The Stock Exchange of Thailand (SET) to act as an entity specifically for issuing depositary receipts. Payments to the holders of BCP-DR2 will be backed by payments from BCP's subordinated convertible debentures. To link BCP's subordinated convertible debentures with SIAMDR's BCP-DR2, SIAMDR will surrender its related rights on the subordinated convertible debentures to the BCP-DR2 holders.
The BCP-DR2 is supported by the MOF's principal protection letter under the approval of the cabinet. Importantly, the MOF guarantees to buy back the BCP-DR2 at the original offering price if certain conditions occur: if BCP defaults on the subordinated convertible debentures' interest payments, if BCP shareholders resolve to liquidate or appoint a liquidator, or if the court orders the appointment of a receiver. Because only the principal is protected and not the interest payments, TRIS Rating estimates the expected loss of interest to BCP-DR2 holders by assuming various scenarios of default by BCP. The expected loss depends upon losses of interest after the default of BCP-DR2 and BCP's probability of default, derived from its credit quality. To determine the initial credit rating of BCP-DR2, TRIS Rating compares the expected loss and standard deviation with expected loss and standard deviation benchmarks in each rating category.
Furthermore, TRIS Rating analyzes any interruption from SIAMDR's operational and legal risks in the structural provisions caused by the extent of commingled risk SIAMDR would have. The commingled risk has been evaluated to the extent that SIAMDR operates as a single-purpose company and would be affected by the shareholder's bankruptcy.
TRANSACTION OVERVIEW
Issuer: Owned by the SET, SIAMDR is established and organized as a company to issue Bt4,000 million BCP-DR2 and Bt3,000 million BCP-DR1. SIAMDR uses the proceeds from the BCP-DR1 and BCP-DR2 to simultaneously purchase common stock and subordinated convertible debentures to be issued by BCP in the early 2004.
Underlying Issuer/Underlying Securities: BCP is an oil refining and marketing company in Thailand. BCP has suffered from weak financial performance since the 1997 regional and domestic economic crisis, to the extent that the government resolved on 8 July 2003 to have the company begin a corporate and financial restructuring program. As a result, BCP will issue Bt4,000 million in 10-year subordinated convertible debentures and Bt3,000 million in common stock.
Securities Rated: The BCP-DR2 is issued by SIAMDR as a depositary receipt. The depositary receipt is defined as a security by The Securities and Exchange Commission (SEC). To conform with the SEC's regulation, the BCP-DR2 is backed by payments of the subordinated convertible debentures' payments to SIAMDR. The BCP-DR2 holders have rights linked to the rights of BCP's subordinated convertible debentureholders. The major rights encompass interest on BCP's principal and interest payments, as well as voting rights on behalf of SIAMDR.
Credit Support: The holders of BCP-DR2 receive principal protection by the MOF. The holders have the right to sell the BCP-DR2 back to the MOF at the original offering price before its maturity date if either i) BCP defaults on the subordinated convertible debentures' interest payments, or ii) BCP's shareholders resolve to liquidate or appoint a liquidator, or the court appoints a receiver. In addition, the holders have the right to sell the BCP-DR2 back to the MOF at the original offering price at maturity if they do not want to convert the depositary receipts into the subordinated convertible debentures.
CREDIT ANALYSIS OF THE UNDERLYING COMPANY
BANGCHAK PETROLEUM PUBLIC COMPANY LIMITED
INDUSTRY
The oil refining and marketing industry encompasses a number of companies purchasing crude oils from both domestic and/or international crude oil suppliers. The crude oil is refined and sold through wholesalers and retail networks. In addition to refining, some companies also operate retail businesses such as service stations, often featuring convenience stores or perhaps fast food outlets. In general, the industry is considered a risky one, characterized by its cyclical and volatile earnings.
There are seven oil refining companies operating in Thailand with total refining capacity of about 1.012 million barrels per day. Despite around 18,000 petrol service stations nationwide, the refining and marketing industry has been dominated by five large Thai and multinational companies. Profits in the refining business come mainly from the quantity of refined products sold and the spread between the price of crude oil and the price of refined products distributed to wholesalers (gross refinery margin or GRM). Revenues from the marketing business are generated largely from the refined products sold and the marketing margin added to the wholesale price of refined products sold to i) direct customers and independent service stations, and ii) the retail business - the service station network and amenities. Typically, the revenues from the marketing margin on products sold to the service station network make up a large proportion of the marketing business and can offset the volatility of the refining business.
After the petroleum industry was deregulated in 1991, the industry was exposed to international price risk for crude oil and refined products. Domestic oil refineries have to compete with imports of refined products from the refineries in the Asia-Pacific region. The Thai government has introduced international prices to the domestic market and abandoned price controls on refined oil products. The domestic wholesale prices of refined products must be set to be competitive with the prices of imported products. The refineries, therefore, have employed import parity as a pricing principle by pricing their products in relation with market prices in Singapore, the largest exporter in the Asian region and closet exporter to Thailand. As a result, the GRM of Thailand's refineries has moved along with margins of Singaporean refiners and Thailand's import costs from Singapore.
A decade ago, Asia-Pacific oil refiners and marketers benefited from soaring demand for refined oil. From 1987 to 1997, the demand for refined oil in the Asia-Pacific region grew at a compounded rate of 5.67% per annum. During the 1992-1997, the Asia-Pacific region processed crude oil at an average utilization rate of 86%. The expectation of continuous demand growth under nearly full capacity utilization stimulated many countries in the Asia-Pacific region, including Thailand, to scale up their refinery capacity and the number of service stations.
When the Asian financial crisis emerged in 1997, the region plunged into a protracted economic slump. Demand for refined products plummeted, sticking refiners with excess capacity. During the 1998-2000, demand for refined products growing at 2% per year was unable to absorb the excess capacity. The GRM (cracking) in Singapore serves as an accurate barometer of the regional competitive pressure. It fell from US$3.10 per barrel in 1996 to US$0.95 per barrel in 1999. GRM for Thai refiners mirrored the regional decline, falling from US$5.88 per barrel in 1996 to US$1.62 per barrel in 1999.
In 2002, Thailand consumed 35,907 million litres of total refined products. For a decade, the compound annual growth rate of consumption for quantities of refined oil was 5.80% per year, nearly the economic growth rate of 5.36%. The compound annual growth rate of domestic refined oil demand was 12% per year during the 1988-1996, sliding to -3.23% per year during the 1997-2001, and rebounding to 3% in 2002.
Anticipation of continued growth for refined oil products drove Thailand to increase total oil refining capacity from 445,000 barrels per day in 1994 to 824,000 barrels per day in 1997. The number of petrol service stations more than doubled from 5,765 stations in 1994 to 12,208 in 1997. Refineries and service stations were both hit with excess capacity when the 1997 economic crisis broke.
The refining business suffered with excess refining capacity ranging between 16% and 29% during the 1998-2001. Too many service stations pushed intense competition at the retail level, hurting the marketing business. Sluggish demand growth and excess supply limited the ability of the industry to pass on higher crude oil prices and foreign exchange losses to consumers. Average market margin was squeezed from Bt1.28 per litre in 1997 to Bt0.93 per litre in 2000. To offset losses from the refining business, some oil refining and marketing companies have restructured their service station networks based upon non-price competition in a bid to enhance sale volumes.
After several years of weak performance due to regional GRM pressure, which was caused by persistent excess supply and flat domestic demand, regional demand began to recover in 1999 and domestic demand followed, recovering in 2002. In 2003, the growth of demand for refined products in Thailand was projected to be 6%. The domestic GRM and marketing margin had improved in 2003. Moreover, the Asia-Pacific region's annual demand growth rates for refined products have improved, as have utilization rates. However the uncertain outlook for oil prices attributable to the Middle East, OPEC, and the Iraq situation still increases the volatility of the industry's earnings.
The industry is passing through a trough of the industry cycle. It is likely that the domestic excess supply could be absorbed by the continuing economic recovery, especially if the economy continues to grow at 5%-7% per year over the next three years. The competitive pressure on regional gross margins could begin to be lessened as the strong regional economies reduce the Asia-Pacific region's excess capacity through 2006. Against the past negative trends, the earnings of Thai oil refining and marketing companies could improve in the medium term. However, volatile crude oil prices can still make forecasting of earnings quite difficult.
BUSINESS
As a major oil refining and marketing company in Thailand, Bangchak Petroleum PLC (BCP) owns and operates an oil refinery located in Bangkok, with a capacity of 120,000 barrels per day, accounting for 12% of total Thailand's total refining capacity. The company operates nearly 1,200 stations under the "Bangchak" brand name, representing 6% of Thailand's service stations.
BCP was established as a state-owned company to operate a downstream petroleum business including procurement, refining, and distribution, by a government resolution on 19 June 1985. To be independently managed, BCP was transformed into a state-owned public company listed on the Stock Exchange of Thailand in 1993. At the end of October 2003, BCP's shareholders comprise of the Ministry of Finance (holding 48% of the total shares), PTT PLC (24%), and others (28 %).
BCP has stakes in Bangchak Green Net (BGN), holding 49% of the total shares and Fuel Pipeline Transportation Ltd. (FPT) with 11% of the total shares. BGN was created to operate service stations owned by BCP, under the Bangchak brand name. BGN manages 149 service stations, each including a convenient store or a community store.
BCP sold refined oil products equal to 4,506 million litres or 12% market share in 2002. Refined oil products are distributed through wholesalers, direct users, and to service stations. Total sales come from these main products: high-speed diesel or HSD, fuel oil, gasoline, and others. The company's market share has barely changed over the years.
Ranked sixth in terms of capacity among seven refiners, BCP's refinery is categorized as a simple technology refiner using hydroskimming. The finished product mix for the refinery is usually refined oil: gasoline (15%), diesel (38%), fuel oil (33%) and others (14%). The other refineries, except Rayong Purifier which uses condensate residue as raw material, have an average yield of refined oil equal to 22%, 39%, 18% and 21% respectively. In comparison with other domestic oil refineries, BCP's refinery yields less gasoline and diesel -- the higher-valued products -- than other refineries. In order to solve technology inflexibility problem, BCP has import crude oil from the Far East where a source of sweet oil which generates more high-yield products. However, Far East crude oil price is often been more expensive than the Middle East crude. The company has imported crude oil sources from the Far East, the Middle East, and other sources with a proportion of 51%:49%:0% whereas the average proportion of refineries is 19%:74%:7%. Besides the imported crude oil, BCP has used domestic crude oil, which has the quality equal to the Far East crude oil, around 16% of its total purchased crude oil. BCP has a transportation cost advantage from accessing the domestic crude oil sources and it plans to use much more local crude.
As of September 2003, BCP had 1,113 service stations: 149 owned and operated by BCP (COCO), 125 owned by BCP and operated by private operators (CODO), 206 jointly owned by BCP and private companies (JV), 114 owned and operated by private companies under the Bangchak brand name (DODO), and 519 owned and operated by cooperatives (COOP). Currently, BCP has the second largest number of service stations, following PTT. The retail stations' sales volumes account for only 32% of its refining capacity as of June 2003.
Prior to the 1997 economic crisis, BCP's refining and marketing operating performance had continually advanced along with both domestic and regional economic growth. The company had generated EBITDA worth Bt2,000-Bt3,000 million in 1995-1996. Until the economic crisis, BCP did not encounter any financial or business difficulties. BCP suffered with poor liquidity and large foreign exchange losses after a change to a managed floating exchange rate system in 1997 because most of its debt was foreign currency-denominated debt.
Combined with an increased debt burden, the industry risks arising from competitive pressures of excess supply, sluggish demand growth, and volatile oil prices have depressed the company's refinery business. Domestic GRM has dropped and has been more volatile since 1997. The refinery operated at lower utilization rates, dropping from 82% in 1997 to 61% in 2002, counter to the industry uptrend in which some of the other companies' refined products were exported. For the retail marketing segment, BCP is unable to profitably manage its own service stations.
To counteract the severe competition since 1997, BCP had launched many initiatives such as new products, cost reduction programs, and service station improvements. However, its competitive position within the industry had been weak because of its refining technology limitations, and underutilized marketing assets. BCP's cash flow from operations had hardly matched its debt service requirements.
On 8 July 2003, the State Enterprises Policy Commission proposed to the cabinet a business solution for BCP. The cabinet resolution was broadly separated into two plans: corporate restructuring and financial restructuring. As part of the corporate restructuring, the refining business would be separated from the marketing business; controlling BGN and consolidating its financial statements, forming alliances, and liquidating its unutilized lands. The financial restructuring will focus on restructuring existing debts and boosting net worth.
BCP is in the process of implementing its new corporate strategies as part of the corporate restructuring. BCP has been attempting to substitute more crude oil from the Gulf of Thailand, resulting in its transportation cost saving. The company estimates it will refine 20,000-40,000 barrels per day of the domestic crude oil with a minimum benefit of one dollar per barrel. To mitigate its technology inflexibility, BCP has a cooperative business agreement with Thai Oil, one refining subsidiary of PTT. BCP has transmitted excess long-residue fuel oils to be cracked at Thai Oil in order to extract more high-value light products. Net benefits are shared between BCP and Thai Oil on an equal basis. The company estimates annual cracking volume of 6.8 million barrels with a benefit of $0.40 per barrel. BCP begins to co-load crude oil from Middle East with Thai Oil which enables both firms to utilize the largest vessel size, resulting in transportation savings from economies of scale for both parties. The company estimates annual co-loading volume of 10 million barrels with a benefit of $0.20 per barrel. Other refinery strategies encompass exchanging refined products with other refineries to optimize value; using condensate residue from aromatic plants as raw material; and increasing its refining efficiency.
For its marketing improvement plan, BCP has improved retail stations in potential areas. The improvement has been implemented for 14 service stations in 2003 with satisfying results: average sales volume increased. BCP continues to improve 50 service stations per year for the next three years. BCP is seeking a strategic partner to operate its existing 130 convenience stores to improve its profitability. In addition, the company plans to form alliances to launch new businesses in retail stations; enhancing refined oil quality and offering self-service stations in selected areas. The company aims to increase its market share in the fuel oil for industrial customers segment. If BCP's refinery and marketing improvement can be fully achieved, its competitive position and cash from operations would improve.
FINANCE
Until the domestic and regional economic crisis in 1997, BCP had regularly paid dividends to shareholders and maintained moderate leverage. The company's leverage became more aggressive as a consequence of foreign exchange losses from foreign currency-denominated debt and erosion in net worth from operating losses. Total debt to capital peaked at 90% in 2001, dropping slightly to 81% in 2002. As of September 2003, the company's total liabilities are nearly Bt24 billion. Meanwhile, the company has total net worth of roughly Bt3.8 billion, down from Bt10 billion in 1997.
BCP's profitability has deteriorated due to the depreciation of the baht combined with the fluctuation of foreign exchange rates and oil prices, narrowed GRM and marketing margins, and reductions in refined sales volumes. Between 1997 and 2003, the company's operating income before depreciation and amortization to sales had been volatile, ranging from -1.3% to 6%. Pretax return on permanent capital had dropped from 11.2% in 1997 to 0.82% as of September 2003 (annualized). By holding crude oil inventory levels at 40-50 days during the course of market oil price fluctuations, cost of goods sold had been volatile, resulting in unpredictable earnings, as a risk of the industry.
Cash flow protection was weak and volatile. Based upon BCP's First-In First-Out (FIFO) inventory accounting treatment, the funds from operations to total debt ratio had plummeted from 14.2% in 1996 to around -8.5% and 8.5% in 1997-2003. Likewise, EBITDA interest coverage had changed from 2.15 times in 1996 to vary between -1.2 times and 2.2 times in 1997-2002.
In accordance with the cabinet's resolutions for financial restructuring, BCP has to adjust its ability to pay debt in line with its cash flow from operations through capital restructuring: debt reduction and net worth restructuring. BCP will borrow both permanent working capital and long-term debt from financial institutions, worth Bt12,500 million to partly prepay its Bt19,500 million debts as the thrust of its debt reduction plan. As a result, BCP's interest expense burden will decrease by Bt400-Bt500 million per year. To restructure its net worth, the company reduced its common stock par value from Bt10 per share to one baht per share, eliminating much of the retained loss. The two major shareholders -- the MOF and PTT -- will swap their shares for BCP-DR1 at a conversion ratio of 10:5. Other existing shareholders are able to convert at a ratio of 10:9. After restructuring, the MOF and PTT will dilute their ownership in BCP to 34%, which will mean BCP will no longer be a state enterprise. BCP will raise Bt3,000 million in new common stock and raise Bt4,000 million by selling 10-year subordinated convertible debentures. The MOF will provide the principal protection to both the BCP-DR1 and the BCP-DR2, allowing investors to sell them back to the MOF at the offering prices. After the completion of the financial restructure implemented, the company's leverage will becomes less aggressive.
Financial Statistics and Key Financial Ratios
Bangchak Petroleum PLC
Unit: Bt million
---- Year-ended 31 December ----
9/2003 2002 2001 2000 1999
Sales 44,093 51,804 48,483 52,118 38,621
Gross interest expenses 852 1,394 1,333 1,261 1,217
Net income from operations (641) 545 (2,950) (1,169) (1,753)
Funds from operations (FFO) 261 1,685 (1,785) (203) 1,090
Capital expenditures 169 214 253 275 319
Total assets 28,211 28,901 26,393 29,028 28,936
Total debt 19,430 19,833 21,201 18,623 14,858
Shareholders' equity 3,794 4,586 2,431 5,772 7,759
Operating income before depre. and amort. as % of sales 1.78 5.37 (1.33) 2.11 6.03
Pretax return on permanent capital (%) 0.62* 7.64 (6.69) 0.32 3.95
EBITDA interest coverage (times) 0.17 1.32 (1.21) 0.06 0.74
FFO/total debt (%) 1.34* 8.50 (8.42) (1.09) 7.34
Total debt/capitalization (%) 83.66 81.22 89.71 76.34 65.69
* Based on nine-month figures ending September 2003 (not annualized).
-- All rights reserved --
Date of Announcement: 28 January 2004
SIAM DR COMPANY LIMITED
Issue Rating:
Bt4,000 million depositary receipts on Bangchak Petroleum PLC's subordinated convertible debentures due 2014 AA
TRANSACTION SUMMARY
Issuer: Siam DR Co., Ltd.
Legal Structure: SIAMDR is established specifically to issue depositary receipts linked to the underlying securities issued by the underlying issuer.
Underlying Issuer: Bangchak Petroleum PLC.
Underlying Securities: BCP's subordinated convertible debentures.
Securities Rated: Bt4,000 million depositary receipts on BCP's subordinated convertible debentures due 2014 (BCP-DR2) -- issued to purchase the subordinated convertible debentures from the underlying issuer.
Securities Structure: Depositary receipts linked to underlying securities.
Credit Support: Principal protection for the BCP-DR2 is provided by the Ministry of Finance.
Registrar: Thailand Securities Depository Co., Ltd.
RATIONALE
The "AA" rating is assigned to the proposed Bt4,000 million depositary receipts on Bangchak Petroleum PLC's (BCP) subordinated convertible debentures (BCP-DR2) of Siam DR Co., Ltd. (SIAMDR). The rating* reflects (1) credit support in terms of principal protection provided by the Ministry of Finance (MOF) to buy back the BCP-DR2 at the original offering price should BCP be unable to make timely scheduled payments, (2) the underlying issuer's credit quality, and (3) the additional security elements embedded into the transaction structure itself.
(* The "AA" rating assigned by TRIS Rating represents our evaluation of the likelihood of timely payment of interest and ultimate payment of principal on the rated depositary receipts as scheduled under the terms of the applicable transaction documents. TRIS Rating's structured finance ratings are intended to be directly comparable to other ratings assigned by TRIS Rating.)
BCP's credit quality is derived from its position as an oil refining and marketing company operating with high financial leverage compared with TRIS Rating's financial ratio benchmarks. The company also has underutilized marketing business assets (i.e. its network of service stations) in a risky industry characterized by competitive pressures from domestic and regional supply-demand imbalances, cyclicality along the economic cycle, and unpredictable earnings due to oil price fluctuations. These weaknesses are being mitigated partly by a corporate and financial restructuring program with assistance from the government, and stronger oil demand stemming from the continuing economic recovery.
Prior to its corporate and financial restructuring program, BCP has encountered weak operating and financial performance since the 1997 economic crisis. To alleviate BCP's difficulties, the cabinet resolved on 8 July 2003 to require BCP to undertake a corporate and financial restructuring program. The corporate restructuring aims to improve efficiency in both the refining and marketing businesses to enhance cash from operations. Cash flow protection and profitability will improve if the restructuring program meets its goals.
The main purpose of the financial restructuring is to lower BCP's financial leverage. BCP's capital structure will change from its current debt level of Bt19,500 million in loans and debentures to Bt12,500 million in permanent working capital and long-term loans from financial institutions, Bt3,000 million in common stock, and Bt4,000 million in 10-year subordinated convertible debentures. The financial restructuring could lead to lower leverage. In addition to its corporate and financial restructuring program, reduced competitive pressures in the industry arising from domestic and regional economic recoveries would also boost BCP's competitiveness and earnings in the medium term.
According to the financial restructuring program, the BCP-DR2 will be issued to bolster BCP's corporate and financial restructuring program under the government's support. According to the program, the BCP-DR2 will be one of two issued securities: BCP-DR2 and depositary receipts on BCP's common stock (BCP-DR1). In order to fund part of BCP's financial restructuring program, BCP-DR1 and BCP-DR2 will be issued by SIAMDR to buy BCP's common stock and subordinated convertible debentures, respectively. SIAMDR is established and owned by The Stock Exchange of Thailand (SET) to act as an entity specifically for issuing depositary receipts. Payments to the holders of BCP-DR2 will be backed by payments from BCP's subordinated convertible debentures. To link BCP's subordinated convertible debentures with SIAMDR's BCP-DR2, SIAMDR will surrender its related rights on the subordinated convertible debentures to the BCP-DR2 holders.
The BCP-DR2 is supported by the MOF's principal protection letter under the approval of the cabinet. Importantly, the MOF guarantees to buy back the BCP-DR2 at the original offering price if certain conditions occur: if BCP defaults on the subordinated convertible debentures' interest payments, if BCP shareholders resolve to liquidate or appoint a liquidator, or if the court orders the appointment of a receiver. Because only the principal is protected and not the interest payments, TRIS Rating estimates the expected loss of interest to BCP-DR2 holders by assuming various scenarios of default by BCP. The expected loss depends upon losses of interest after the default of BCP-DR2 and BCP's probability of default, derived from its credit quality. To determine the initial credit rating of BCP-DR2, TRIS Rating compares the expected loss and standard deviation with expected loss and standard deviation benchmarks in each rating category.
Furthermore, TRIS Rating analyzes any interruption from SIAMDR's operational and legal risks in the structural provisions caused by the extent of commingled risk SIAMDR would have. The commingled risk has been evaluated to the extent that SIAMDR operates as a single-purpose company and would be affected by the shareholder's bankruptcy.
TRANSACTION OVERVIEW
Issuer: Owned by the SET, SIAMDR is established and organized as a company to issue Bt4,000 million BCP-DR2 and Bt3,000 million BCP-DR1. SIAMDR uses the proceeds from the BCP-DR1 and BCP-DR2 to simultaneously purchase common stock and subordinated convertible debentures to be issued by BCP in the early 2004.
Underlying Issuer/Underlying Securities: BCP is an oil refining and marketing company in Thailand. BCP has suffered from weak financial performance since the 1997 regional and domestic economic crisis, to the extent that the government resolved on 8 July 2003 to have the company begin a corporate and financial restructuring program. As a result, BCP will issue Bt4,000 million in 10-year subordinated convertible debentures and Bt3,000 million in common stock.
Securities Rated: The BCP-DR2 is issued by SIAMDR as a depositary receipt. The depositary receipt is defined as a security by The Securities and Exchange Commission (SEC). To conform with the SEC's regulation, the BCP-DR2 is backed by payments of the subordinated convertible debentures' payments to SIAMDR. The BCP-DR2 holders have rights linked to the rights of BCP's subordinated convertible debentureholders. The major rights encompass interest on BCP's principal and interest payments, as well as voting rights on behalf of SIAMDR.
Credit Support: The holders of BCP-DR2 receive principal protection by the MOF. The holders have the right to sell the BCP-DR2 back to the MOF at the original offering price before its maturity date if either i) BCP defaults on the subordinated convertible debentures' interest payments, or ii) BCP's shareholders resolve to liquidate or appoint a liquidator, or the court appoints a receiver. In addition, the holders have the right to sell the BCP-DR2 back to the MOF at the original offering price at maturity if they do not want to convert the depositary receipts into the subordinated convertible debentures.
CREDIT ANALYSIS OF THE UNDERLYING COMPANY
BANGCHAK PETROLEUM PUBLIC COMPANY LIMITED
INDUSTRY
The oil refining and marketing industry encompasses a number of companies purchasing crude oils from both domestic and/or international crude oil suppliers. The crude oil is refined and sold through wholesalers and retail networks. In addition to refining, some companies also operate retail businesses such as service stations, often featuring convenience stores or perhaps fast food outlets. In general, the industry is considered a risky one, characterized by its cyclical and volatile earnings.
There are seven oil refining companies operating in Thailand with total refining capacity of about 1.012 million barrels per day. Despite around 18,000 petrol service stations nationwide, the refining and marketing industry has been dominated by five large Thai and multinational companies. Profits in the refining business come mainly from the quantity of refined products sold and the spread between the price of crude oil and the price of refined products distributed to wholesalers (gross refinery margin or GRM). Revenues from the marketing business are generated largely from the refined products sold and the marketing margin added to the wholesale price of refined products sold to i) direct customers and independent service stations, and ii) the retail business - the service station network and amenities. Typically, the revenues from the marketing margin on products sold to the service station network make up a large proportion of the marketing business and can offset the volatility of the refining business.
After the petroleum industry was deregulated in 1991, the industry was exposed to international price risk for crude oil and refined products. Domestic oil refineries have to compete with imports of refined products from the refineries in the Asia-Pacific region. The Thai government has introduced international prices to the domestic market and abandoned price controls on refined oil products. The domestic wholesale prices of refined products must be set to be competitive with the prices of imported products. The refineries, therefore, have employed import parity as a pricing principle by pricing their products in relation with market prices in Singapore, the largest exporter in the Asian region and closet exporter to Thailand. As a result, the GRM of Thailand's refineries has moved along with margins of Singaporean refiners and Thailand's import costs from Singapore.
A decade ago, Asia-Pacific oil refiners and marketers benefited from soaring demand for refined oil. From 1987 to 1997, the demand for refined oil in the Asia-Pacific region grew at a compounded rate of 5.67% per annum. During the 1992-1997, the Asia-Pacific region processed crude oil at an average utilization rate of 86%. The expectation of continuous demand growth under nearly full capacity utilization stimulated many countries in the Asia-Pacific region, including Thailand, to scale up their refinery capacity and the number of service stations.
When the Asian financial crisis emerged in 1997, the region plunged into a protracted economic slump. Demand for refined products plummeted, sticking refiners with excess capacity. During the 1998-2000, demand for refined products growing at 2% per year was unable to absorb the excess capacity. The GRM (cracking) in Singapore serves as an accurate barometer of the regional competitive pressure. It fell from US$3.10 per barrel in 1996 to US$0.95 per barrel in 1999. GRM for Thai refiners mirrored the regional decline, falling from US$5.88 per barrel in 1996 to US$1.62 per barrel in 1999.
In 2002, Thailand consumed 35,907 million litres of total refined products. For a decade, the compound annual growth rate of consumption for quantities of refined oil was 5.80% per year, nearly the economic growth rate of 5.36%. The compound annual growth rate of domestic refined oil demand was 12% per year during the 1988-1996, sliding to -3.23% per year during the 1997-2001, and rebounding to 3% in 2002.
Anticipation of continued growth for refined oil products drove Thailand to increase total oil refining capacity from 445,000 barrels per day in 1994 to 824,000 barrels per day in 1997. The number of petrol service stations more than doubled from 5,765 stations in 1994 to 12,208 in 1997. Refineries and service stations were both hit with excess capacity when the 1997 economic crisis broke.
The refining business suffered with excess refining capacity ranging between 16% and 29% during the 1998-2001. Too many service stations pushed intense competition at the retail level, hurting the marketing business. Sluggish demand growth and excess supply limited the ability of the industry to pass on higher crude oil prices and foreign exchange losses to consumers. Average market margin was squeezed from Bt1.28 per litre in 1997 to Bt0.93 per litre in 2000. To offset losses from the refining business, some oil refining and marketing companies have restructured their service station networks based upon non-price competition in a bid to enhance sale volumes.
After several years of weak performance due to regional GRM pressure, which was caused by persistent excess supply and flat domestic demand, regional demand began to recover in 1999 and domestic demand followed, recovering in 2002. In 2003, the growth of demand for refined products in Thailand was projected to be 6%. The domestic GRM and marketing margin had improved in 2003. Moreover, the Asia-Pacific region's annual demand growth rates for refined products have improved, as have utilization rates. However the uncertain outlook for oil prices attributable to the Middle East, OPEC, and the Iraq situation still increases the volatility of the industry's earnings.
The industry is passing through a trough of the industry cycle. It is likely that the domestic excess supply could be absorbed by the continuing economic recovery, especially if the economy continues to grow at 5%-7% per year over the next three years. The competitive pressure on regional gross margins could begin to be lessened as the strong regional economies reduce the Asia-Pacific region's excess capacity through 2006. Against the past negative trends, the earnings of Thai oil refining and marketing companies could improve in the medium term. However, volatile crude oil prices can still make forecasting of earnings quite difficult.
BUSINESS
As a major oil refining and marketing company in Thailand, Bangchak Petroleum PLC (BCP) owns and operates an oil refinery located in Bangkok, with a capacity of 120,000 barrels per day, accounting for 12% of total Thailand's total refining capacity. The company operates nearly 1,200 stations under the "Bangchak" brand name, representing 6% of Thailand's service stations.
BCP was established as a state-owned company to operate a downstream petroleum business including procurement, refining, and distribution, by a government resolution on 19 June 1985. To be independently managed, BCP was transformed into a state-owned public company listed on the Stock Exchange of Thailand in 1993. At the end of October 2003, BCP's shareholders comprise of the Ministry of Finance (holding 48% of the total shares), PTT PLC (24%), and others (28 %).
BCP has stakes in Bangchak Green Net (BGN), holding 49% of the total shares and Fuel Pipeline Transportation Ltd. (FPT) with 11% of the total shares. BGN was created to operate service stations owned by BCP, under the Bangchak brand name. BGN manages 149 service stations, each including a convenient store or a community store.
BCP sold refined oil products equal to 4,506 million litres or 12% market share in 2002. Refined oil products are distributed through wholesalers, direct users, and to service stations. Total sales come from these main products: high-speed diesel or HSD, fuel oil, gasoline, and others. The company's market share has barely changed over the years.
Ranked sixth in terms of capacity among seven refiners, BCP's refinery is categorized as a simple technology refiner using hydroskimming. The finished product mix for the refinery is usually refined oil: gasoline (15%), diesel (38%), fuel oil (33%) and others (14%). The other refineries, except Rayong Purifier which uses condensate residue as raw material, have an average yield of refined oil equal to 22%, 39%, 18% and 21% respectively. In comparison with other domestic oil refineries, BCP's refinery yields less gasoline and diesel -- the higher-valued products -- than other refineries. In order to solve technology inflexibility problem, BCP has import crude oil from the Far East where a source of sweet oil which generates more high-yield products. However, Far East crude oil price is often been more expensive than the Middle East crude. The company has imported crude oil sources from the Far East, the Middle East, and other sources with a proportion of 51%:49%:0% whereas the average proportion of refineries is 19%:74%:7%. Besides the imported crude oil, BCP has used domestic crude oil, which has the quality equal to the Far East crude oil, around 16% of its total purchased crude oil. BCP has a transportation cost advantage from accessing the domestic crude oil sources and it plans to use much more local crude.
As of September 2003, BCP had 1,113 service stations: 149 owned and operated by BCP (COCO), 125 owned by BCP and operated by private operators (CODO), 206 jointly owned by BCP and private companies (JV), 114 owned and operated by private companies under the Bangchak brand name (DODO), and 519 owned and operated by cooperatives (COOP). Currently, BCP has the second largest number of service stations, following PTT. The retail stations' sales volumes account for only 32% of its refining capacity as of June 2003.
Prior to the 1997 economic crisis, BCP's refining and marketing operating performance had continually advanced along with both domestic and regional economic growth. The company had generated EBITDA worth Bt2,000-Bt3,000 million in 1995-1996. Until the economic crisis, BCP did not encounter any financial or business difficulties. BCP suffered with poor liquidity and large foreign exchange losses after a change to a managed floating exchange rate system in 1997 because most of its debt was foreign currency-denominated debt.
Combined with an increased debt burden, the industry risks arising from competitive pressures of excess supply, sluggish demand growth, and volatile oil prices have depressed the company's refinery business. Domestic GRM has dropped and has been more volatile since 1997. The refinery operated at lower utilization rates, dropping from 82% in 1997 to 61% in 2002, counter to the industry uptrend in which some of the other companies' refined products were exported. For the retail marketing segment, BCP is unable to profitably manage its own service stations.
To counteract the severe competition since 1997, BCP had launched many initiatives such as new products, cost reduction programs, and service station improvements. However, its competitive position within the industry had been weak because of its refining technology limitations, and underutilized marketing assets. BCP's cash flow from operations had hardly matched its debt service requirements.
On 8 July 2003, the State Enterprises Policy Commission proposed to the cabinet a business solution for BCP. The cabinet resolution was broadly separated into two plans: corporate restructuring and financial restructuring. As part of the corporate restructuring, the refining business would be separated from the marketing business; controlling BGN and consolidating its financial statements, forming alliances, and liquidating its unutilized lands. The financial restructuring will focus on restructuring existing debts and boosting net worth.
BCP is in the process of implementing its new corporate strategies as part of the corporate restructuring. BCP has been attempting to substitute more crude oil from the Gulf of Thailand, resulting in its transportation cost saving. The company estimates it will refine 20,000-40,000 barrels per day of the domestic crude oil with a minimum benefit of one dollar per barrel. To mitigate its technology inflexibility, BCP has a cooperative business agreement with Thai Oil, one refining subsidiary of PTT. BCP has transmitted excess long-residue fuel oils to be cracked at Thai Oil in order to extract more high-value light products. Net benefits are shared between BCP and Thai Oil on an equal basis. The company estimates annual cracking volume of 6.8 million barrels with a benefit of $0.40 per barrel. BCP begins to co-load crude oil from Middle East with Thai Oil which enables both firms to utilize the largest vessel size, resulting in transportation savings from economies of scale for both parties. The company estimates annual co-loading volume of 10 million barrels with a benefit of $0.20 per barrel. Other refinery strategies encompass exchanging refined products with other refineries to optimize value; using condensate residue from aromatic plants as raw material; and increasing its refining efficiency.
For its marketing improvement plan, BCP has improved retail stations in potential areas. The improvement has been implemented for 14 service stations in 2003 with satisfying results: average sales volume increased. BCP continues to improve 50 service stations per year for the next three years. BCP is seeking a strategic partner to operate its existing 130 convenience stores to improve its profitability. In addition, the company plans to form alliances to launch new businesses in retail stations; enhancing refined oil quality and offering self-service stations in selected areas. The company aims to increase its market share in the fuel oil for industrial customers segment. If BCP's refinery and marketing improvement can be fully achieved, its competitive position and cash from operations would improve.
FINANCE
Until the domestic and regional economic crisis in 1997, BCP had regularly paid dividends to shareholders and maintained moderate leverage. The company's leverage became more aggressive as a consequence of foreign exchange losses from foreign currency-denominated debt and erosion in net worth from operating losses. Total debt to capital peaked at 90% in 2001, dropping slightly to 81% in 2002. As of September 2003, the company's total liabilities are nearly Bt24 billion. Meanwhile, the company has total net worth of roughly Bt3.8 billion, down from Bt10 billion in 1997.
BCP's profitability has deteriorated due to the depreciation of the baht combined with the fluctuation of foreign exchange rates and oil prices, narrowed GRM and marketing margins, and reductions in refined sales volumes. Between 1997 and 2003, the company's operating income before depreciation and amortization to sales had been volatile, ranging from -1.3% to 6%. Pretax return on permanent capital had dropped from 11.2% in 1997 to 0.82% as of September 2003 (annualized). By holding crude oil inventory levels at 40-50 days during the course of market oil price fluctuations, cost of goods sold had been volatile, resulting in unpredictable earnings, as a risk of the industry.
Cash flow protection was weak and volatile. Based upon BCP's First-In First-Out (FIFO) inventory accounting treatment, the funds from operations to total debt ratio had plummeted from 14.2% in 1996 to around -8.5% and 8.5% in 1997-2003. Likewise, EBITDA interest coverage had changed from 2.15 times in 1996 to vary between -1.2 times and 2.2 times in 1997-2002.
In accordance with the cabinet's resolutions for financial restructuring, BCP has to adjust its ability to pay debt in line with its cash flow from operations through capital restructuring: debt reduction and net worth restructuring. BCP will borrow both permanent working capital and long-term debt from financial institutions, worth Bt12,500 million to partly prepay its Bt19,500 million debts as the thrust of its debt reduction plan. As a result, BCP's interest expense burden will decrease by Bt400-Bt500 million per year. To restructure its net worth, the company reduced its common stock par value from Bt10 per share to one baht per share, eliminating much of the retained loss. The two major shareholders -- the MOF and PTT -- will swap their shares for BCP-DR1 at a conversion ratio of 10:5. Other existing shareholders are able to convert at a ratio of 10:9. After restructuring, the MOF and PTT will dilute their ownership in BCP to 34%, which will mean BCP will no longer be a state enterprise. BCP will raise Bt3,000 million in new common stock and raise Bt4,000 million by selling 10-year subordinated convertible debentures. The MOF will provide the principal protection to both the BCP-DR1 and the BCP-DR2, allowing investors to sell them back to the MOF at the offering prices. After the completion of the financial restructure implemented, the company's leverage will becomes less aggressive.
Financial Statistics and Key Financial Ratios
Bangchak Petroleum PLC
Unit: Bt million
---- Year-ended 31 December ----
9/2003 2002 2001 2000 1999
Sales 44,093 51,804 48,483 52,118 38,621
Gross interest expenses 852 1,394 1,333 1,261 1,217
Net income from operations (641) 545 (2,950) (1,169) (1,753)
Funds from operations (FFO) 261 1,685 (1,785) (203) 1,090
Capital expenditures 169 214 253 275 319
Total assets 28,211 28,901 26,393 29,028 28,936
Total debt 19,430 19,833 21,201 18,623 14,858
Shareholders' equity 3,794 4,586 2,431 5,772 7,759
Operating income before depre. and amort. as % of sales 1.78 5.37 (1.33) 2.11 6.03
Pretax return on permanent capital (%) 0.62* 7.64 (6.69) 0.32 3.95
EBITDA interest coverage (times) 0.17 1.32 (1.21) 0.06 0.74
FFO/total debt (%) 1.34* 8.50 (8.42) (1.09) 7.34
Total debt/capitalization (%) 83.66 81.22 89.71 76.34 65.69
* Based on nine-month figures ending September 2003 (not annualized).
-- All rights reserved --