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Fitch Rates CP ALL's Hybrids 'BBB(tha)', Unsecured Bonds 'A-(tha)'
July 4, 2017 / 4:24 AM / 5 months ago

Fitch Rates CP ALL's Hybrids 'BBB(tha)', Unsecured Bonds 'A-(tha)'

(The following statement was released by the rating agency) BANGKOK, July 04 (Fitch) Fitch Ratings (Thailand) Limited has assigned CP ALL Public Company Limited's (CP ALL, A(tha)/Stable) up to THB10 billion of new subordinated perpetual debentures a 'BBB(tha)' National Long-Term Rating. Simultaneously, Fitch has assigned CP ALL's up to THB3 billion of new senior unsecured bonds due in 2027 an 'A-(tha)' National Long-Term Rating. The subordinated perpetual debentures, which are payable upon dissolution and give the issuer rights to early redemption and unconditional interest deferral, qualify for 50% equity credit under Fitch's "Non-Financial Corporates Hybrids Treatment and Notching Criteria". This categorisation is supported by the subordination of the debentures to other debt, the debentures' deemed effective maturity of more than five years, and the issuer's right to defer coupon payments. Fitch assesses the effective maturity of the subordinated perpetual debentures to be on the 10th anniversary of the issuance, due to the debentures' coupon step-up of over 100bp from year 11. Therefore, the 50% equity credit will change to 0% five years before the effective maturity date. The rating on the senior unsecured bonds is one notch below CP ALL's 'A(tha)' National Long-Term Rating due to a significant amount of prior-ranking debt, which made up 3.7x of the company's EBITDA in the 12 months to March 2017. The proceeds from the bonds will be used for refinancing maturing bonds and for working capital. KEY RATING DRIVERS Rating Reflects Deep Subordination: The perpetual debentures have been notched down by three notches from CP ALL's National Long-Term Rating because of their deep subordination and higher-than-usual loss-absorption. The debentures are notched down from the National Rating by more than the standard two notches due to a significant amount of prior ranking debt, which also results in CP ALL's senior unsecured debt being rated one notch below the company's rating. High Financial Leverage: Fitch expects CP ALL's FFO-adjusted net leverage to gradually decrease to about 4.0x in 2018. CP ALL has been deleveraging more slowly than previously expected (i.e. below 3.5x by 2018) because of a weak domestic economy over the past two years. Sales of shares in subsidiary Siam Makro Public Company Limited (Makro) are also unlikely to be carried out over the next 12-18 months. Moderate-but-Defensive Growth: Fitch expects CP ALL's sales to increase by 9%-10% per year in 2017-2018, driven mainly by new store openings and a recovery in same-store sales growth to 3.0%-4.0% a year for both 7-Eleven and Makro stores (1Q17: 1.2% and 2.4%, respectively), in line with the domestic economic recovery. The company also continues to benefit from the "defensive" nature of its business, which sells daily essentials with low revenue and margin volatility; its medium-term growth potential is still supported by Thailand's immature market for modern-food retailing. Leading Market Position: We believe CP ALL is likely to maintain its leading position despite intense competition. The company has more than 9,700 stores nationwide, and a more-than-60% share of the convenience-store market in Thailand, far more than its closest rival. Its dominance is supported by its large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development. 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. DERIVATION SUMMARY CP ALL has a strong domestic market position as the largest convenience store chain in Thailand, similar to The Siam Cement Public Company Limited (SCC, A(tha)/Positive), the largest cement and downstream petrochemicals producer in Thailand and Thai Oil Public Company Limited (TOP, AA-(tha)/Stable), the largest oil refiner in Thailand. However, CP ALL has a stronger competitive position, with its market share significantly larger than that of its closest rival. CP ALL also has lower business risk than SCC and TOP, which are exposed to cyclical demand for their products and the fluctuation of commodity price. This is reflected in CP ALL's more stable EBITDAR margin. CP ALL's financial leverage is, however, significantly higher than both peers, due to the debt incurred from the leveraged buy-out of Makro in 2013. Given the sector's low capital intensiveness, CP ALL's financial leverage should decrease over time. CP ALL's lower business risk should compensate for its higher financial leverage than SCC. However, the financial leverage of TOP, which is very low at about 1.0x, warrants a higher rating. TOP's credit rating is also notched up to reflect its linkage to the PTT group. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 9%-10% per year in 2017-2018; - EBITDAR margin to improve to 10.2%-10.4% in 2017-2018; - 700 new 7-Eleven stores per year in 2017-2018 and four new large-format stores per year for Makro in 2017-2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO-adjusted net leverage at less than 3.5x (end-March 2017: 5.3x) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A failure to reduce FFO-adjusted net leverage to below 4.5x by 2018 - Deterioration in EBITDAR margin to below 7.5% on a sustained basis (1Q17: 10.4%) LIQUIDITY Strong Liquidity: CP ALL had total debt of THB193 billion as of end-March 2017. About 10.4% will be due in the 12 months from end-March 2017. About 94% of total debt is Thai baht bonds, 69% of which are secured by Makro shares. The liquidity is mainly supported by its cash balance of THB24.7 billion at end-March 2017, its strong cash flow generation as well as its strong access to debt capital markets. 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 Jeong Min Pak Senior Director +82 2 3278 8360 Summary of Financial Statement Adjustments - - The outstanding amount of subordinated perpetual debentures is based on the face value due at maturity, instead of net of issuance cost shown in the audited financial statements. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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