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Fitch Rates Bangkok Mass Transit System's Debentures at 'A(tha)'
October 7, 2016 / 9:41 AM / in a year

Fitch Rates Bangkok Mass Transit System's Debentures at 'A(tha)'

(The following statement was released by the rating agency) BANGKOK, October 07 (Fitch) Fitch Ratings (Thailand) Limited has assigned an 'A(tha)' National Long-Term Rating to Bangkok Mass Transit System Public Company Limited's (BTSC, A(tha)/Stable) senior unsecured debentures. The debentures, totalling up to THB20bn, will be issued in multiple tranches with due dates up to 2026 and are rated at the same level as BTSC's National Long-Term Rating. Proceeds will be used to fund BTSC's mass transit business capex and investments. The company does not have significant secured debt. Key Rating Drivers Ratings Equalised With Parent: Fitch bases BTSC's National Long-Term Rating on the consolidated profile of its parent, BTS Group Holdings Public Company Limited (BTS Group, A(tha)/Stable), due to strong operating and strategic linkages, as per Fitch's Parent and Subsidiary Linkage criteria. Limited Rating Headroom: We expect interest costs from additional debt associated with BTSC's electrical and mechanical (E&M) system project to significantly reduce its debt service coverage from cash flows. As such, any material increase in investments, weaker-than-expected cash generation in the medium term, or a debt structure that adds high debt servicing costs could lead to a negative rating action. E&M Project Reduces Flexibility: Fitch expects BTS Group's FFO-adjusted net leverage to increase above 3.5x in the financial year ending-March 2017 (FY17) until FY20, from 1.7x at end-June 2016, due to the costs incurred from the E&M project. These costs will be repaid in one lump sum by Krunthep Thanakom Company Limited (KT) in four years, at the earliest, under the terms of the contract for the E&M project. KT is a wholly owned enterprise of Bangkok Metropolitan Administrator (BMA), the entity that governs Bangkok, and operates the sky trains' Green Line extensions (Saphan Taksin-Bang Wa stations and On Nut- Bearing stations) and the Bangkok Bus Rapid Transit system. We expect BTS Group's financial leverage to return below 3.5x in FY21 as its earnings increase from train procurement and operation and maintenance services, even if KT exercises the option to pay for the E&M project in six years, instead of four. However, BTSC will have far less financial flexibility over the next two to three years due to the additional interest costs on debt to fund the E&M contract. We expect FFO net cash interest coverage to weaken to about 3.0x-3.5x for BTS Group and about 2.0x-2.5x for BTSC in FY18-FY19. Adequate Liquidity: BTS Group's liquidity should remain sound due to the strong dividend from its 33% investment in BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF), large cash balance and treasury investments. However, Fitch expects lower dividends from BTSC for some time. E&M Project Risks Contained: Fitch considers the project risks for the E&M contract to be low. The contract contains a pass-through of performance risks and cost overruns to the consortium contractors, including Bombardier Transportation Signal (Thailand) Limited, which has a proven record as the E&M contractor of the existing Green Lines. BTSC will also receive accrued interest on its investment, at a pre-agreed rate, as part of the lump sum payment from KT. Steady Cash Generation: BTSC's mass-transit (excluding new mass-transit lines) and media businesses generate strong cash flow and have low capex requirements. These are the two main businesses that generate cash to support group capex, including investments in new mass-transit lines, property and service businesses in the medium term. Leading Mass Transit Operator: BTSC has a strong position in Bangkok's mass-transit sector. The company operates Bangkok's BTS Skytrain network, which covers key commercial and strategic locations, and handled around 70% of passenger volume in the capital's mass-transit rail system in 2015. Solid Media Operations: Fitch believes BTSC's media operations, which provide advertising space on the BTS Skytrain network and elsewhere, will continue to generate strong earnings and cash flows in the medium term. The BTS Skytrain-related media operations are generally stable, which should help mitigate the weak near-term outlook for Thailand's broader media industry. KEY ASSUMPTIONS Fitch's key assumptions within our rating case include: - EBITDAR margin of around 40%-45% over the next three years - The mass transit business to be granted operation and maintenance contracts for three new mass transit lines - About THB9bn of capex over FY17-FY19, in addition to E&M investment costs - Full payment for E&M project received in FY21 - THB30bn additional debt to fund the E&M project and train procurement - High dividend payment for FY17 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - positive rating action on BTS Group Negative: Future developments that may, individually or collectively, lead to negative rating action include: - negative rating action on BTS Group The rating sensitivities for the parent, BTS Group, are as follows: Fitch does not expect positive rating action over the medium term given the increase in debt and reduced financial flexibility from the E&M project. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - FFO net cash interest coverage at below 3.0x for BTS Group or below 2.5x for BTSC; - Larger-than-expected capex and investment, weaker earnings, or delayed payment for the E&M project leading to a slower-than-expected deleveraging and FFO-adjusted net leverage of BTS Group remaining above 3.5x in FY21; - A significant increase in business risks Contacts: Primary Analyst Nichaya Seamanontaprinya Associate Director +66 2108 0161 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road Lumpini, Patumwan Bangkok 10330 Secondary Analyst Obboon Thirachit Director +66 2108 0159 Committee Chairperson Sajal Kishore Senior Director +61 2 8256 0321 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@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. 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. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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