TRIS Rating Co., Ltd. has assigned the “BBB+” rating to the proposed issue of up to Bt1,100 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed CK’s company rating and the ratings of CK’s existing debentures at “BBB+”. The rating outlook remains “negative”. The proceeds from the new debentures are for debt refinancing and future business expansion. 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 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 pressure on cash flow generation as a result of competitive market environment and political instability.
The “negative” outlook reflects a highly levered capital structure and challenges facing CK in generating cash flows to service debt obligation and financial commitments in concession projects. The ratings could be downgraded if the company fails to improve operating margin or its capital structure deteriorates. On the other hand, the outlook could be revised back to “stable” should the company succeed in building up backlog with respectable margins that prove to enhance cash flows over the medium term, as well as demonstrate an ability to bring down its financial leverage.
TRIS Rating reported that CK is one of the top three construction companies in Thailand. The company’s 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 December 2009, the company’s backlog was Bt13,864 million, of which 72% was the Purple-Line electric train project. The backlog has been under pressure in recent years due to an intensely competitive market on the back of scarcity of large-scale public projects. The backlog is expected to improve in the near future if the government could roll out large-scale infrastructure projects under the stimulus package as planned.
CK’s concessions cover several infrastructure assets, including expressways, underground mass transit, tap water, and electricity. As of December 2009, the investments included a 16.4% stake in Bangkok Expressway PLC (BECL), a 24.6% holding in Bangkok Metro PLC (BMCL), a 31.6% in Thai Tap Water Supply PLC (TTW), and a 38.0% in South East Asia Energy Co., Ltd. (SEAN). Recurring dividend income from BECL and TTW help reduce exposure to the volatile and cyclical construction revenue. The Nam Ngum II project undertaken by SEAN is approximately 95% complete. The project is expected to generate income by 2011. BMCL’s unprofitable results continue to weigh on CK’s credit profile.
CK’s cash flow generation in 2010 should continue to be under pressure as revenue from the Nam Ngum II project gradually winds down. However, current projects on hand, expected backlog improvement, and dividend income should generate a reasonable cash flow contribution in coming years. CK’s leverage level is high. Concession investments are mostly funded by debt, resulting in a continuing elevation of leverage level. TRIS Rating cautions on CK’s financial commitments in terms of shareholder supports to BMCL and concession investments, which should constrain the company’s efforts to bring down its debt level over the medium term. The company has to keep the ratio of net debt to equity below 2.5 times as required by financial covenants. As of December 2009, the ratio was at 2.1 times and was later improved from a capital injection of Bt844 million via rights offering in February 2010. The company’s financial flexibility is enhanced by an investment portfolio of sound marketable securities. As of December 2009, the market value of CK’s holding in TTW was Bt5,589 million, compared with the book value reported in the balance sheet at Bt2,344 million. CK also plans to list SEAN on the stock market in the near future. TRIS Rating expects CK to continue exploring alternatives and executing necessary fund raising measures to support its debt reduction efforts and future investments. -- End
Company Rating: Affirmed at BBB+ Issue Ratings: CK107A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ CK114A: Bt2,000 million senior debentures due 2011 Affirmed at BBB+ CK11OA: Bt1,000 million senior debentures due 2011 Affirmed at BBB+ CK122A: Bt1,616.2 million senior debentures due 2012 Affirmed at BBB+ CK126A: Bt1,400 million senior debentures due 2012 Affirmed at BBB+ CK13OA: Bt2,000 million senior debentures due 2013 Affirmed at BBB+ CK142A: Bt883.8 million senior debentures due 2014 Affirmed at BBB+ Up to Bt1,100 million senior debentures due within 2014 BBB+ Rating Outlook: Negative
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