TRIS Rating Co., Ltd. has downgraded the company rating of CH. Karnchang PLC (CK) and the ratings of CK’s existing debentures to “BBB+” from “A-”. At the same time, TRIS Rating has assigned the rating of “BBB+” to CK’s proposed up to Bt2,000 million senior debentures. The rating outlook is “stable”. The downgrades reflect negative credit implications of the loss of CK’s claim in the dispute between BBCD joint venture (BBCD) and the Expressway and Rapid Transit Authority of Thailand (ETA), its high financial leverage due to investments in concessions, and declining in profit margins that are the result of increasing construction costs and a sluggish domestic construction market. The ratings continue to reflect CK’s leading position in Thailand’s engineering and construction (E&C) industry, a proven record of investments in government infrastructure projects, and its ability to generate recurring income from concession investments.
The “stable” outlook reflects the expectation that CK still has some flexibility to pursue its growth strategy by using internal cash flow to fund investments in good quality concessions, so as not to further deteriorate its financial profile from the current level.
TRIS Rating reported that CK’s ratings had been placed on CreditAlert with “negative” implications in February 2007 following the Supreme Court’s ruling on the dispute between BBCD and the ETA. The court’s ruling stated that the ETA is not obliged to pay any compensation or interest for the increased project cost of Bt6,039 million claimed by BBCD. The verdict hurts CK’s financial profile because it had to reverse around Bt2,500 million of project income that it recognized in 2001 after BBCD won in arbitration and ETA issued a letter to BBCD confirming its agreement to pay. BBCD has extended the repayment terms for Bt3,449 million in loans (CK’s portion) from its partner, Bilfinger Berger AG (BB), and three local banks. Currently, BBCD is in the process of filing a new claim with the Court under the notion that it still has a legal right to claim the additional construction costs from the ETA despite the negative ruling of the Supreme Court as such ruling is final and binding for BBCD. The final and binding effect, however, relates to the enforcement of the arbitration award only. The company expects that the legal process may take up to three years.
TRIS Rating said, CK is one of the top three general contractors in Thailand. Its operations have diversified into the concessions business via several affiliates and a related party. The construction business has typically contributed around 80%-90% of total revenues and earnings before interest, tax, depreciation, and amortization (EBITDA). However, this pattern is expected to change in the future after several concessions become more profitable. The company’s revenue from construction has grown rapidly during the past three years, from Bt6,852 million in 2004 to Bt18,918 million in 2006. However, its gross profit margins were squeezed from 20.4% to 9.5% during the same period, due mainly to cost overruns on the South Outer Ring Road project and higher competition in bidding for both public and private sector projects. In the first quarter of 2007, the company’s gross profit margin for the construction business rose to 10.50%, due mainly to the contribution from the Nam Ngum II Dam Project. As of March 2007, CK’s backlog was Bt23,452 million, with 67% concentrated in the Nam Ngum II Dam Project.
CK’s concessions cover several infrastructure assets, including expressway, underground mass transit, tap water, and electricity. As of March 2007, the value of its investments in concessions, using the equity method, was Bt8,160 million. The investments include a 14.71% stake in Bangkok Expressway PLC (BECL), a 24.61% stake in Bangkok Metro Co., Ltd. (BMCL), a 46.15% stake in Thai Tap Water Co., Ltd. (TTW), a 28.50% stake in South East Asia Energy Co., Ltd. (SEAN), and a 42.58% shareholding in Phatum Thani Water Co., Ltd. (PTW). In June 2007, CK sold 5.06 million shares of PTW to TTW, reducing CK’s stake in PTW to 0.05%. TTW currently owns 98% of PTW. Most of CK’s investments in concessions were funded by debts, which caused CK’s leverage to increase over the past three years. BECL and TTW have already contributed dividends and equity income to CK, while BMCL still experiences losses. Management plans to list TTW on the Stock Exchange of Thailand (SET) in the near future. SEAN is in the construction phase and is expected to generate income no later than 2011, said TRIS Rating. -- End
CH. Karnchang PLC (CK):
Company Rating: Downgraded to BBB+ from A-
Issue Ratings:
CK07OA: Bt2,000 million senior debentures due 2007 Downgraded to BBB+ from A-
CK08OA: Bt610 million senior debentures due 2008 Downgraded to BBB+ from A-
CK08OB: Bt1,090 million senior debentures due 2008 Downgraded to BBB+ from A-
CK099A: Bt2,000 million senior debentures due 2009 Downgraded to BBB+ from A-
CK09OA: Bt120 million senior debentures due 2009 Downgraded to BBB+ from A-
CK09OB: Bt880 million senior debentures due 2009 Downgraded to BBB+ from A-
CK102A: Bt1,100 million senior debentures due 2010 Downgraded to BBB+ from A-
CK107A: Bt2,000 million senior debentures due 2010 BBB+
Rating Outlook: Stable
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Copyright 2007, 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. 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.
The “stable” outlook reflects the expectation that CK still has some flexibility to pursue its growth strategy by using internal cash flow to fund investments in good quality concessions, so as not to further deteriorate its financial profile from the current level.
TRIS Rating reported that CK’s ratings had been placed on CreditAlert with “negative” implications in February 2007 following the Supreme Court’s ruling on the dispute between BBCD and the ETA. The court’s ruling stated that the ETA is not obliged to pay any compensation or interest for the increased project cost of Bt6,039 million claimed by BBCD. The verdict hurts CK’s financial profile because it had to reverse around Bt2,500 million of project income that it recognized in 2001 after BBCD won in arbitration and ETA issued a letter to BBCD confirming its agreement to pay. BBCD has extended the repayment terms for Bt3,449 million in loans (CK’s portion) from its partner, Bilfinger Berger AG (BB), and three local banks. Currently, BBCD is in the process of filing a new claim with the Court under the notion that it still has a legal right to claim the additional construction costs from the ETA despite the negative ruling of the Supreme Court as such ruling is final and binding for BBCD. The final and binding effect, however, relates to the enforcement of the arbitration award only. The company expects that the legal process may take up to three years.
TRIS Rating said, CK is one of the top three general contractors in Thailand. Its operations have diversified into the concessions business via several affiliates and a related party. The construction business has typically contributed around 80%-90% of total revenues and earnings before interest, tax, depreciation, and amortization (EBITDA). However, this pattern is expected to change in the future after several concessions become more profitable. The company’s revenue from construction has grown rapidly during the past three years, from Bt6,852 million in 2004 to Bt18,918 million in 2006. However, its gross profit margins were squeezed from 20.4% to 9.5% during the same period, due mainly to cost overruns on the South Outer Ring Road project and higher competition in bidding for both public and private sector projects. In the first quarter of 2007, the company’s gross profit margin for the construction business rose to 10.50%, due mainly to the contribution from the Nam Ngum II Dam Project. As of March 2007, CK’s backlog was Bt23,452 million, with 67% concentrated in the Nam Ngum II Dam Project.
CK’s concessions cover several infrastructure assets, including expressway, underground mass transit, tap water, and electricity. As of March 2007, the value of its investments in concessions, using the equity method, was Bt8,160 million. The investments include a 14.71% stake in Bangkok Expressway PLC (BECL), a 24.61% stake in Bangkok Metro Co., Ltd. (BMCL), a 46.15% stake in Thai Tap Water Co., Ltd. (TTW), a 28.50% stake in South East Asia Energy Co., Ltd. (SEAN), and a 42.58% shareholding in Phatum Thani Water Co., Ltd. (PTW). In June 2007, CK sold 5.06 million shares of PTW to TTW, reducing CK’s stake in PTW to 0.05%. TTW currently owns 98% of PTW. Most of CK’s investments in concessions were funded by debts, which caused CK’s leverage to increase over the past three years. BECL and TTW have already contributed dividends and equity income to CK, while BMCL still experiences losses. Management plans to list TTW on the Stock Exchange of Thailand (SET) in the near future. SEAN is in the construction phase and is expected to generate income no later than 2011, said TRIS Rating. -- End
CH. Karnchang PLC (CK):
Company Rating: Downgraded to BBB+ from A-
Issue Ratings:
CK07OA: Bt2,000 million senior debentures due 2007 Downgraded to BBB+ from A-
CK08OA: Bt610 million senior debentures due 2008 Downgraded to BBB+ from A-
CK08OB: Bt1,090 million senior debentures due 2008 Downgraded to BBB+ from A-
CK099A: Bt2,000 million senior debentures due 2009 Downgraded to BBB+ from A-
CK09OA: Bt120 million senior debentures due 2009 Downgraded to BBB+ from A-
CK09OB: Bt880 million senior debentures due 2009 Downgraded to BBB+ from A-
CK102A: Bt1,100 million senior debentures due 2010 Downgraded to BBB+ from A-
CK107A: Bt2,000 million senior debentures due 2010 BBB+
Rating Outlook: Stable
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Copyright 2007, 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. 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.