March 22, 2017 / 7:47 AM / 4 months ago

Fitch Assigns TREIT's Bonds 'A-(tha)' Rating

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(The following statement was released by the rating agency) BANGKOK, March 22 (Fitch) Fitch Ratings (Thailand) Limited has assigned TICON Freehold and Leasehold Real Estate Investment Trust's (TREIT, A-(tha)/Negative) new senior unsecured bonds a National Long-Term Rating of 'A-(tha)'. The bonds are rated at the same level as TREIT's National Long-Term Rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The bonds, totalling up to THB1.8 billion, will be issued in two tranches due in 2020 and 2024. The proceeds will be used to refinance the existing bank loans. KEY RATING DRIVERS Weakening Occupancy: TREIT's occupancy rate dropped to 78% in December 2016 following the expiration of a rental guarantee on its assets, from an average occupancy of about 90% during the year. In addition, TREIT terminated the lease of one of the company's 10 largest tenants in June 2016 due to the tenant's financial difficulties. The lower occupancy rate did not meet Fitch's expectation of an average rate of around 90% for the year. Moderate renewal risk also exists, as 27% of the company's lease contracts, based on leased area, will expire in 2017, although this is mitigated by TREIT's high retention rate and location scarcity. Fitch expects TREIT's occupancy rate to increase to 87%-88% in 2018. High Tenant Concentration: TREIT has high tenant concentration, with the 10 largest tenants contributing around 50% of revenue in 2016. Fitch expects concentration risk to persist longer than initially forecast, as a change in TICON group's major shareholder caused the group to suspend asset sales. As TICON group is TREIT's main sponsor, this delayed TREIT's portfolio growth in 2016 and possibly into 2017. The prospects for TREIT's portfolio growth depend on the policies of TICON group's new management, which have not been finalised. TREIT is seeking assets from other developers, but the potential asset size would not compensate for the assets available from TICON group. Currently, TREIT does not have a plan to develop its own properties. Debt-Funded Growth: TREIT's net-debt/investment-property value has remained at 20.5% at end-2016, after its planned 4Q16 investment was cancelled. However, as TREIT's medium-term financing policy aims to maintain net-debt/investment-property value at about 30%, it is possible that TREIT will fund its investment through debt. The company's credit metrics remain within Fitch's rating expectations, but further debt-funded acquisitions could lead to negative rating action as this would raise financial leverage above our expectations. Sound Asset-Liability Matching: Fitch expects TREIT to maintain sound asset-liability matching. The refinancing of the existing bank loans with these new senior unsecured bonds should shorten TREIT's average debt tenor from more than seven years to less than five years, bringing forward the earliest debt maturity to 2020 for the three-year tranche bonds, from 2021, with a small instalment for its existing bank loans. The average lease term-to-maturity of TREIT's investment properties was about 3.2 years at end-2016, with about 19% of its total leasable area secured by long-term lease contracts expiring between 2023 and 2027. TREIT's debts are all unsecured with unencumbered asset-cover of 4.0x at end-2016. Well-Located Assets: TREIT's rating reflects the contractual certainty of revenue from medium-term lease contracts on its modern factory and warehouse properties, which are in strategic locations in Thailand. DERIVATION SUMMARY TREIT is significantly smaller than WHA Corporation Public Company Limited (BBB+(tha)/Negative), a leading developer of industrial estates and built-to-suit industrial properties for rent in Thailand. TREIT has higher earning visibility from its property rental business and no development risk exposure, while WHA has a large development exposure with project completion risk and about 60% of its EBITDA comes from its industrial land sales business, which is subject to cyclical demand. TREIT's financial leverage is significantly lower than that of WHA, although it could increase in the medium term, and TREIT has high financial flexibility given unencumbered asset cover of 4.0x and an earliest debt maturity in 2020. WHA's financial leverage has surged due to acquisitions in 2015 and it faces a large debt repayment burden in 2016-2017. TREIT has a property portfolio size and tenant diversification level that is similar to that of Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community mall developer in Thailand. However, SF has development risk exposure and TREIT has a significantly higher EBITDA margin of 75%-80%, compared with SF's 40%-45%. TREIT also has much lower financial leverage, but the gap could narrow over the medium term. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Additional investment of THB1.2 billion in 2017, with 100% debt financing, and THB3.5 billion per year in 2018, with 20% debt financing. - Renewal rate of 85% with four to six months to seek new lessees in 2017-2018. - EBITDA margin of 74%-80% in 2017-2018. - No development or significant maintenance capex over 2017-2018. RATING SENSITIVITIES Developments that may, individually or collectively, lead to negative rating action: - sustained weakening in the occupancy rate to below 85%; - net-debt/investment-property value increasing above 30% (end-2016: 20.5%), net-debt/EBITDA above 4.5x (2016: 3.1x) or FFO-fixed charge coverage below 3.5x (2016: 6.3x) on a sustained basis; and - inability to expand the portfolio efficiently to improve its top-10 tenant concentration to below 40% of revenue. Fitch may revise the Outlook to Stable from Negative if TREIT demonstrates that the negative rating guidelines are unlikely to be met on a sustained basis. LIQUIDITY Comfortable Liquidity Levels: Fitch expects TREIT to have enough liquidity in the next two to three years to comfortably cover interest payment, with EBITDA/interest expense expected at above 4.0x. Minimal maintenance capex over is expected for the next two to three years. Contact: Primary Analyst Somruedee Chaiworarat Director +66 2108 0160 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road, Lumpini, Patumwan, Bangkok 10330 Secondary Analyst Nichaya Seamanontaprinya Associate Director +66 2108 0161 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 20 February 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com 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. 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