The downgrades reflect SF’s lower-than-expected recurring income (from discounts on rentals granted to tenants facing financial difficulties), and its large debt-funded investment in the Mega Bangna project, which has contributed to weakening financial leverage and coverage. SF’s financial leverage, measured by adjusted net debt to EBITDAR, rose significantly at end-2009 and end-Q110 to 6.3x and 6.8x, respectively, from 4.3x at end-2008; de-leveraging is likely to be slower than expected. With the expected sale of one project to a property fund in 2010, SF’s financial leverage should improve, though it is likely to remain high at above 5.0x over the next few years.
In Q110, total revenues decreased 20.8% yoy to THB309.5m, mainly as a result the lack of contributions from finance-lease income. SF’s recurring rental and service income, however, increased by 4.6% yoy despite the rental discounts. The lack of higher-margin finance lease income also caused the EBITDAR margin to fall to 47.7% in Q110 (Q109: 50.9%).
SF’s ratings are based on its strong market position as a leading developer of Thai medium-sized shopping centres under a community mall concept, and the high quality of its shopping centre portfolio with high average occupancy rate of more than 90% since inception.
Fitch notes that the ongoing political instability in Thailand, which is affecting consumer confidence and spending, is a concern. Although this does not immediately affect the earnings of retail operators and developers, the political uncertainty could delay the opening of new projects and affect rental increases, which would impact the company’s liquidity and leverage. However the agency does note that medium-sized community malls serving the residents in the surrounding neighborhoods have proven to be more resilient to the weakening economy or political unrest, than the large downtown shopping complexes which focus on leisure and entertainment spending.
The Stable Outlook reflects the agency’s expectation that with its expertise in the business, SF should maintain its strong market position and the quality and steady growth of its shopping centre portfolio, as well as maintain its financial leverage and sufficient liquidity consistent with its current ratings.
Negative ratings factors include higher-than-expected financial leverage, lower-than-expected recurring income and a delay in the opening of a new project. On the other hand, a stronger recurring income and a significant decline in financial leverage to below 4.0x on a sustained basis could positively affect the ratings.
Applicable Criteria available on Fitch’s website at www.fitchratings.com: ‘Corporate Rating Methodology’, dated November 24, 2009.
Fitch has made major improvements to its credit research on EMEA and AsiaPac corporates. To view these improvements, visit our 'Clear Thinking' web page at http://clearthinking.fitchratings.co.uk/Index.html
Contacts: Somruedee Chaiworarat, Bangkok, +662 655 4762; Pimrumpai Panyarachun, +662 655 4752; Vincent Milton, +662 655 4755.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such 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.