Thai Beverage Public Co. Ltd. Rating Lowered To 'BBB-' And 'axBBB+' On Higher Leverage; Outlook Negative

Stocks and Financial Services Press Releases Thursday April 11, 2013 16:20
SINGAPORE--11 Apr--Standard & Poor's
  • We expect Thai Bev's higher debt and lower cash flow adequacy to weaken its financial risk profile over the next 24 months, following the completion of the company's debt-funded acquisition of a stake in F&N.
  • We do not expect the Thailand-based beverage manufacturer's business risk profile to improve significantly during this time.
  • We are lowering our long-term corporate credit rating on Thai Bev to 'BBB-' from 'BBB'. We are also lowering our long-term ASEAN regional scale rating on the company to 'axBBB+' from 'axA'. We removed all the ratings from CreditWatch, where they were placed with negative implications.
  • The negative outlook reflects the risk that management may fail to strengthen the company's financial risk profile, and the risk associated with the likely weakened financial risk profile of Thai Bev's parent TCC Group.

SINGAPORE (Standard & Poor's) April 11, 2013--Standard & Poor's Ratings Services said today that it had lowered its long-term corporate credit rating on Thailand-based beverage manufacturer Thai Beverage Public Co. Ltd. to 'BBB-' from 'BBB'. The outlook is negative. At the same time, we lowered our long-term ASEAN regional scale rating on the company to 'axBBB+' from 'axA'. We removed all the ratings from CreditWatch, where they were placed with negative implications on July 19, 2012.

"We lowered our rating on Thai Bev because we expect the company's debt to remain high and its cash flow adequacy to stay weak over the next 24 months following its acquisition of a stake in F&N," said Standard & Poor's credit analyst Xavier Jean. Thai Bev recently completed a Singapore dollar (S$) 3.3 billion acquisition of a 28.7% stake in Singapore-based conglomerate Fraser & Neave Ltd. (F&N), in conjunction with related party TCC Assets.

We expect the debt-funded acquisition to weaken Thai Bev's financial risk profile to "significant" from "modest," as our criteria define the terms. We project the company's ratio of funds from operations (FFO) to total debt to remain 20%-25% in 2013 and 2014. In our base-case scenario, we forecast the ratio of total debt to EBITDA at about 3.8x in 2013, reducing to about 3.2x in 2014. Our estimates of EBITDA and FFO include Thai baht (THB) 1 billion-THB1.5 billion in dividends annually from F&N.

"The F&N acquisition marks a shift in Thai Bev's financial policies, which we now view as aggressive," said Mr. Jean. "However, we understand that Thai Bev intends to restore its financial profile over the next two years."

Our assessment of Thai Bev's business risk profile remains "satisfactory." We believe that Thai Bev's stake in F&N will not meaningfully improve its product and geographic diversity over the next two years at least.

The negative outlook reflects our expectation that Thai Bev's deleveraging will be slow over the next two years. We expect that a high dividend payout over the period and a temporary spike in capital spending in 2013 will consume all of the company's discretionary cash flows during that year. We forecast the ratio of discretionary cash flows to total debt at negative 2%-0% in 2013, improving marginally to 5%-10% in 2014 and 2015.

The negative outlook also reflects the risks associated with privately-held TCC Group (TCC). TCC Assets, a related party, owns about 61% of F&N. We understand that at least part of TCC Assets' acquisition of F&N was debt-funded. Nevertheless, TCC has not disclosed the amount of the debt, the corporate level at which it will hold the debt, or how it will service the debt. TCC has also not divulged the extent of structural subordination and the degree to which it would rely on cash flows from Thai Bev to service the debt. We understand that cash flows are fully fungible among all TCC group holdings. As a result, related-party transaction risks remain; the dividend that Thai Bev pays to TCC could increase and potentially further slow down the deleveraging.

We could lower the rating if: (1) Thai Bev's financial risk profile does not improve to "intermediate" over the next two years, including the FFO-to-total-debt ratio less than 30% and total debt-to-EBITDA ratio more than 3x; (2) we perceive that the related-party risk has heightened such that material related-party transactions and shareholder-friendly initiatives weaken Thai Bev's business or financial risk profiles; or (3) we believe that TCC's financial profile has deteriorated.

We could revise the outlook to stable if Thai Bev deleverages more rapidly than we expect. Indicative financial metrics include FFO-to-total-debt ratio of more than 30% by the end of 2014 and total-debt-to-EBITDA ratio below 3x on a sustainable basis. These could materialize if higher-than-expected revenue growth and margin result in stronger discretionary cash flows. An outlook revision would also require a clear mitigation of the current related-party risk between TCC and Thai Bev. That could include a better understanding of TCC's financial standing and its financial policies regarding Thai Bev.


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