The bonds, which will total up to THB40bn, will be issued in eight tranches due in 2017, 2019, 2021 and 2024. The bonds will be secured by shares of Siam Makro Public Company Limited (Makro) held by CP ALL. The proceeds from the bonds will be used to refinance some of CP All’s existing bank loans.
The secured bonds are rated at the same level as CP ALL’s National Long-Term Rating as the bonds are secured on a similar basis as CP ALL’s existing secured loans and secured bonds, which represent more than 90% of CP ALL’s total debt.
Key Rating Drivers
Dominant Market Position: CP ALL is the largest operator of convenience stores in Thailand, with more than 7,800 stores nationwide. It commands a market share of approximately 60% of stores, far above the second-largest operator. CP ALL is very likely to maintain its dominant position in the competitive industry. It is supported by its larger network and coverage, and has well-established supporting functions - such as logistics, supply and maintenance, and staff training and development.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international convenience store brand. The company was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, and the first store opened in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
Diversifying into Wholesale: The acquisition of Makro - the market leader in modern food wholesaling stores in Thailand - was CP ALL’s first foray into the wholesaling business. This transaction will increase and broaden the company’s customer base to create Thailand’s largest company in the food retail sector.
Defensive, but Strong Growth: CP ALL benefits from the “defensive” cash flow nature of the sector, where products are essential to everyday life, with low revenue and margin volatility, while its growth potential is underpinned by Thailand’s immature market for modern food retail. We expect revenue to sharply increase in 2014, partly due to full-year consolidation of Makro’s earnings. CP ALL’s strong growth is likely to continue over the medium term, driven by new store openings and like-for-like (LFL) sales growth, although LFL sales growth is likely to slow in 2014.
Weak Credit Metrics: Given CP ALL’s expected strong free cash flow generation, its high financial leverage is likely to improve over the next four to five years. Makro’s more aggressive expansion plan may result in negative free cash flow (FCF) for Makro itself and CP ALL on a consolidated basis in 2014. However, this should only slightly delay Fitch’s previous deleveraging expectations. Fitch expects funds flow from operations (FFO)-adjusted net leverage to reduce to 5.0x-5.5x by 2015 and to below 3.5x by 2017 from 8.5x in 2013.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A slower-than-projected deleveraging with FFO-adjusted net leverage remaining significantly above 5.0x in 2015 and above 3.5x in 2017
- A deterioration in EBITDAR margin to below 8.5% on a sustained basis (2013: 10.1%)
- Negative free cash flow generation for two consecutive years
Positive rating action over the next 12-24 months is unlikely due to the company’s high financial leverage.