The bonds, which will total up to THB10bn, will be issued in two tranches due in 2017 and 2026. 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
Leading Market Position: CP ALL is the largest operator in Thailand’s convenience store sector, with more than 8,000 stores nationwide. It has a market share of about 60% of all convenience stores in the country, far more than the second-largest operator. CP ALL is likely to maintain its leading position despite intense competition. Its large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development support its position.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening 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 both increases and broadens 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, which sells products essential to everyday life, with low revenue and margin volatility; while growth potential is underpinned by Thailand’s immature market for modern food retail. Fitch expects sharp sales growth in 2014 partly due to full-year consolidation of Makro. CP ALL’s strong growth over the medium term is likely to continue, propelled by the opening of new stores and like-for-like (LFL) sales growth, although LFL growth is likely to slow in 2014.
Weak Credit Metrics: CP ALL’s financial leverage is likely to improve over the next four to five years, given its expected strong cash-flow generation. Makro’s more aggressive expansion plans may cause negative FCF in 2014. However, Fitch expects the deleveraging will be only slightly delayed with FFO-adjusted net leverage to be reduced to 5.0x-5.5x by 2015, and to below 3.5x by 2017 from 7.6x at end-September 2014.
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 (9M14: 10%)
- 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.