TRIS Rating Co., Ltd. has announced a rating outlook revision for Italian-Thai Development PLC (ITD) to “negative” from “stable”, which reflects the concerns of TRIS Rating over the lower financial flexibility of ITD in the short to medium term. At the same time, TRIS Rating has affirmed the company and issue ratings of ITD at “BBB+”. The ratings reflect ITD’s strong position as the largest general construction contractor in Thailand, large backlog, broad product line, geographic diversity, track record and the expertise to undertake large and complex projects. The ratings also take into consideration the inherent risk of fixed unit price contracts, the cyclical nature of the engineering and construction (E&C) industry, intense competition, and rising level of financial leverage.
The “negative” outlook reflects ITD’s lower financial flexibility in the short to medium term from the deterioration in the capital structure. At the end of December 2008, ITD had a cash balance of Bt4,048 million with repayment obligations of approximately Bt11,331 million over the next twelve months. Although operating performance is expected to improve in 2009, the large principal and interest payments continue to limit financial flexibility in the near term. Currently, the company is negotiating with its main bank to reschedule long-term loan repayments of green field projects to match the expected cash infusion from the sale of investments. The ratings may be downgraded if the company’s operating performance does not improve and financial leverage remains at high level.
TRIS Rating reported that ITD had a net loss of Bt2,656 million in 2008 caused mainly by a slide in operating margin to 1.9% from 8.5% in 2007. The lower margin was mainly due to huge losses on overseas projects especially the Nam Theun 2 hydroelectric dam project in Laos and steel structure work, and unprecedented rises in raw materials prices in the first nine months of 2008. The low operating margin was also a result of higher selling, general, and administration (SG&A) expenses due to provisions for claims against a subsidiary and the administration expenses of new or recently opened subsidiaries. The loss was a one-time event and should not affect future cash flow. As evidence, operating margin recovered in the fourth quarter of 2008 to 8.13% from -11.65% in the third quarter of 2008. The losses have eroded the equity base and raised the level of financial leverage.
The level of financial leverage is relatively high for ITD’s rating level. Leverage is higher as a result of debt-funded investments in the past and decreases in equity from the huge construction losses. The amount of adjusted debt (including a loan commitment to a special purpose vehicle - SPV) increased from Bt17,792 million in 2007 to Bt25,118 million as of December 2008. The adjusted debt to capitalization ratio weakened from 51.4% in 2007 to 66.4% in 2008. Due to its relatively large amount of debt, interest expense is a significant burden. However, declining interest rate trend should benefit the company as most of ITD’s financing cost was tied to the minimum lending rate (MLR) which declined from an average of 7.06% in 2008 to 6.25% as at March 2009. The company plans to deleverage by divesting its investment in Nam Theun 2 Power Co., Ltd. (NTPC). However, the transaction is not expected to close until the first quarter of 2010 due to restrictions in the shareholding agreement. The company expects to receive Bt4,200 million to Bt6,000 million, in cash depending on the valuation.-- End
Company Rating: Affirmed at BBB+ Issue Ratings: ITD099A: Bt706.7 million senior debentures due 2009 Affirmed at BBB+ ITD109A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ Rating Outlook: Negative
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