Bangkok--5 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has today revised the rating Outlook on Thailand-based The Erawan Group Plc ("Erawan") to Negative from Stable. At the same time, Fitch affirmed Erawan's National Long- and Short-term senior unsecured debt ratings at 'BBB(tha)' and 'F3(tha)', respectively.
The change in Outlook is based on Erawan's more aggressive investment policy, which weakens its financial flexibility. Apart from its initial investment plan for two new hotels, the group recently announced additional investment totalling around THB5.8 billion, consisting of a four-star hotel in Pattaya and another 10 new economy hotels in Thailand's six key tourist destinations. Although this helps increase diversification and provides strong earnings growth prospects, Fitch views that the expected cash outflow for new hotel projects during 2006-2008, which is substantially higher than the previous year's, should weaken its financial leverage profile and put pressure on its liquidity management. Erawan's financial flexibility should tighten during the expansion stage and the group is more exposed to execution risk of new hotel projects.
Fitch views that any further investment plans or an unexpected slowdown in the lodging industry could negatively affect ratings. Meanwhile, evidence of strong cash flow generation and more conservative investments, which could improve leverage more than currently anticipated by Fitch, would serve to stabilise the ratings.
Erawan's senior unsecured debt ratings reflect its high-quality assets, its strong brand recognition and established relationship with leading international hotel chains, as well as its strong operating performance and cash flow generating capability. Nonetheless, the ratings take into account the sensitivity of the lodging sector to economic cyclicality and travel shocks. The impact from a slowdown in the global economy, the increasing threat of worldwide terrorism and the sustained high oil price could undermine the hotel industry demand. Other credit concerns include expected intensifying competition in Bangkok's luxury hotel sector, which is currently Erawan's core business. Meanwhile, the structural subordination resulting from the high level of secured and subsidiary debt (accounting for about 80% of the group's debt at end-9M06) also affects the recovery prospects of Erawan's senior unsecured debt.
Taking into account its additional investment plans, its net adjusted debt/EBITDAR ratio is expected to increase to around 6.0x in 2007 (9M06: 4.7x), while the expected stronger EBITDAR from new hotel projects should result in a gradual decline in leverage thereafter. The agency notes that the net-interest-bearing debt/EBITDA ratio is expected to increase to around 5.5x in 2007 (9M06: 4.2x), approaching the maximum limit of 6.0x specified in the group's existing financial covenants. Meanwhile, the higher portion of short-term debt and ambitious expansion plans should tighten Erawan's financial liquidity, although a cash balance of THB100m at end-9M06, its undrawn committed credit facilities of around THB788m at end-2006, and expected cash flow generation, should partly support its liquidity needs.
Contacts: Soamsiri Chadavadh, Wasant Polcharoen, Vincent Milton; Bangkok, Tel: +662 655 4755
Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with sub- or low-investment grade international sovereign ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(tha)' for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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