TRIS Rating Co., Ltd. has revised the rating outlook of CH. Karnchang PLC (CK) to “negative” from “stable,” reflecting a highly levered capital structure and challenges facing CK in generating cash flows to service debt obligation and financial commitments in concession projects. At the same time, TRIS Rating has affirmed the company and current issue ratings of CK at “BBB+”, and has assigned the rating of “BBB+” to CK’s proposed issue of up to Bt1,400 million in senior debentures. The proceeds from the new debentures, together with the Bt2,500 million debentures issued in February 2009, will be used to repay bonds totalled Bt3,000 million later this year. The ratings reflect CK’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in undertaking government infrastructure and specialized projects, and an ability to generate recurring income from concession investments. The ratings are partially offset by high financial leverage due to concession investments, backlog concentration, the inherent risk of fixed-price contracts, and downward pressure on profit margins as a result of a slowdown construction market.
Due to the “negative” outlook, the ratings of CK could be downgraded if the company fails to strengthen its cash flow profile and de-lever balance sheet within 1-2 years. On the other hand, the outlook could be revised back to “stable” should the company succeed in building up backlogs with respectable margins that prove to enhance cash flows over the medium term, as well as demonstrate an ability to bring down a considerable extent of its financial leverage.
TRIS Rating reported that CK is one of the top three construction companies in Thailand. Its construction experience encompasses a broad array of construction activities, ranging from general civil work to highly sophisticated projects. These diverse experiences, together with a strong relationship with leading foreign contractors, help enhance the company’s business profile. As of June 2009, the outstanding backlog was approximately Bt7.8 billion, almost half of which was concentrated in the Nam Ngum II dam project. The backlog will be enhanced after the company could finalize an agreement to construct the first contract of Purple-Line electric train worth approximately Bt14,842 million.
TRIS Rating said, CK’s concessions cover several infrastructure assets, including expressways, underground mass transit, tap water, and electricity. As of March 2009, the investments included a 16.6% stake in Bangkok Expressway PLC (BECL), a 24.6% share of Bangkok Metro PLC (BMCL), a 38.0% holding in South East Asia Energy Co., Ltd. (SEAN), and a 35.3% holding in Thai Tap Water Supply PLC (TTW). Recurring cash flow streams via dividends from investments in BECL and TTW help CK reduce exposure to the volatile construction revenue. The Nam Ngum II project undertaken by SEAN is in the construction phase and is expected to generate income by 2011. BMCL’s unprofitable results continue to weigh on CK’s credit profile.
CK’s financial profile continues to be under pressure by high leverage and low cash flow generation. CK’s concession investments are mostly funded by debt, resulting in a continuing elevation of leverage level. Liquidity is partly enhanced by a large holding of sound marketable securities. TRIS Rating cautions on CK’s future financial commitments in terms of shareholder supports to BMCL and concession investments, which constrain the company’s efforts to bring down its debt level over the medium term. The company’s balance sheet capacity is limited by financial covenant of keeping net debt to equity ratio below 2.5 times. As of March 2009, the ratio stood at around 2.4 times. Over the next 1-2 years, CK’s financial risk is expected to stay escalated in view of political instability and economic contraction, said TRIS Rating. — End
Company Rating: Affirmed at BBB+ Issue Ratings: CK099A: Bt2,000 million senior debentures due 2009 Affirmed at BBB+ CK09OA: Bt120 million senior debentures due 2009 Affirmed at BBB+ CK09OB: Bt880 million senior debentures due 2009 Affirmed at BBB+ CK102A: Bt1,100 million senior debentures due 2010 Affirmed at BBB+ CK107A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ CK114A: Bt2,000 million senior debentures due 2011 Affirmed at BBB+ CK122A: Bt1,616.2 million senior debentures due 2012 Affirmed at BBB+ CK142A: Bt883.8 million senior debentures due 2014 Affirmed at BBB+ Up to Bt1,400 million senior debentures due within 2012 BBB+ Rating Outlook: Negative from Stable
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