TRIS Rating Co., Ltd. has affirmed the company rating of Advance Agro PLC (AA) at “BBB” with “stable” outlook. The rating reflects AA’s strong position as the leading short-fiber pulp and printing & writing paper (P&W paper) producer in Thailand and its fully integrated and efficient plant. The rating also takes into consideration the increasing demand for pulp and paper in both the domestic and export markets. However, these strengths are partially offset by the company’s relatively high financial leverage, inherent price volatility in the pulp and paper industry, and increasing production costs. Another factor is the company’s technical default status on the 13% Guaranteed Notes, which are due in 2007 though the possibility that the noteholders will accelerate the payment is quite low. The current shareholder structure of AA after Thai Asset Management Corporation (TAMC) sold the 18.9% shareholding of the Damnernchanvanich family, pursuant to the enforcement of a pledge on the shares of AA, to foreign investors is also a concern. This sale may constitute a Change of Control Triggering Event under the terms of the 11% senior notes due in 2012, if any third party gains control of more than 35% of the company’s shares, which could have a negative impact on credit profile of the company.
The “stable” outlook reflects that the favorable export markets and increasing acceptance of AA’s “Double A” brand in both the domestic and export markets should help stabilize operating performance in the short- to medium-term. In addition, the company is expected to defer plans to invest in a new paper mill until its financial position strengthens.
TRIS Rating reported that AA is the leading pulp and P&W paper producer in Thailand. The company and its subsidiaries own two pulp mills, with a total production capacity of around 510,000 tonnes per year (tpy), and three paper machines that provide total capacity of around 564,000 tpy. Around 80% of AA’s consolidated revenues came from the paper business, while around 15% came from the pulp business; the rest was from selling electricity and other sources. The company’s export sales made up more than 60% of the revenue from the pulp and paper businesses. The sales volumes of pulp and paper in the first nine months of 2006 grew by 40% year on year (y-o-y) and 6% y-o-y, respectively. The company is the largest exporter of short-fiber pulp in Thailand, exporting around 82,384 tonnes of pulp in 2005 and 96,756 tonnes in the first nine months of 2006. The company had a 25% share of the domestic P&W paper market in 2005, declining from around 29% in the previous year.
TRIS Rating said that as of December 2005, AA issued 11% senior notes due in 2012 to refinance its debts under the Master Override Agreement made with three local banks. Though the refinancing increases the flexibility of AA by releasing all of its assets pledged with these local banks, the relatively high coupon rate will negatively impact the profitability and earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratios. At the end of September 2006, AA’s outstanding debts were Bt13,717 million, down 12.1% from Bt15,378 million in December 2005. AA’s debt to capitalization ratio as of September 2006 improved to 49.06% from 55.63% in 2005. However, the debt to capitalization ratio is expected to remain at around 45%-50% in the medium term since the major portion of the company’s debts are 11% bonds which will mature in 2012. In 2007, the company has an obligation to pay its 13% bonds worth US$48.72 million, which the company plans to refinance by using bank loans.