TRIS Rating Co., Ltd. has affirmed the company rating of TPI Polene PLC (TPIPL) at "BBB-" and has raised its outlook to "positive" from "stable". The rating takes into consideration the increasing demand for cement in the domestic market, the company's strong position as the third largest cement producer in Thailand and its position as the leader in low density polyethylene (LDPE) market in Thailand. However, these strengths are partially offset by the cyclical nature of both the cement and petrochemical industries, the company's rather high debt level, and its pending qualified auditor's report concerning the total amount of outstanding debt. According to the auditor's report, the total liability to all creditors recorded by the company and its subsidiaries, which includes accrued default interest payable, exceeds the total claims made by all creditors under the Master Restructuring Agreement. However, certain individual creditors have filed claims exceeding the liability recorded for these creditors by the company. The rating assigned by TRIS Rating is based on the management's claim that the differences between the amount of debts claimed by the creditors and that which was reported by the company are the result of the use of different methods to calculate interest. Any significant change in the amount of debts reported by the company would impact the rating assigned by TRIS Rating.
While the "positive" outlook reflects TPIPL's improved financial position after it raised Bt11,000 million in new equity during January 2004 to repay existing debt. Though its profitability did not improve much last year due to unplanned interruptions at two of its cement plants, TRIS Rating expects that TPIPL should be able to improve its operating income over the next few years. A rating upgrade will be considered if the company is able to sustain its improving operating performance and lower its debt to an acceptable level for a higher rating. Success in refinancing existing debt to match its internal cash generation would also be a positive rating factor.
TRIS Rating reported that in 2004, TPIPL's cement sales grew more slowly than its major competitors, Siam Cement PLC (SCC) and Siam City Cement PLC (SCCC), which showed strong volume growth of around 10% and value growth of around 20%. TPIPL's lower growth was due to an unplanned interruption in two production lines, which happened at the same time as the planned maintenance schedule of the third line. All three production lines halted for one month, cutting production by around 700,000 tons. Without the stop, sales growth would likely have been in line with its peers. TPIPL should be able to fully utilize its production capacity in 2005 to serve rising domestic demand for cement, which is expected to increase by 10%-15%. Currently, the cement and LDPE plants are running close to full capacity. To complete an expansion of cement plant line 4 will cost TPIPL approximately Bt6,000 million more and will require approval from the creditors; thus, the uncertainty for this project remains high. In addition, the dispute between TPIPL and its equipment suppliers, Krupp Polysius AG and Projecktall Industrieberatung GmbH, is still under the court process.
Though TPIPL's debt level declined significantly in 2004, the level is still considered high. In addition, lower interest expenses resulting from principal reduction will be partially offset by the increase in the rate of interest from MLR +0.5% (for baht debt) and LIBOR +2% (for foreign debts) in 2004 to MLR +1.5% and LIBOR +3% for 2005-2007. Moreover, extension fees of 0.5%, 0.75%, and 1.0% of outstanding principal will be assessed for 2005, 2006, and 2007, respectively. Thus, the earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratios are expected to remain at around 3-5 times over the next few years. However, the company can improve its earnings by further reducing selling and administrative costs, which are relatively high compared with its peers,TRIS Rating said. - End
TPI Polene PLC (TPIPL) Company Rating: BBB- Rating Outlook: Positive