RPT-Fitch rates Thailand-based CP ALL's new bonds 'A+(tha)'

Thu Mar 13, 2014 4:05am EDT

March 13 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings (Thailand) Limited has assigned Thailand-based retailer CP ALL Public Company Limited's (CP ALL) secured bonds an 'A+(tha)' National Long-Term Rating. Simultaneously, the agency has affirmed CP ALL's National Long-Term Rating at 'A+(tha)' with Stable Outlook and National Short-Term Rating at 'F1(tha)'. The rating on the company's outstanding secured bonds is also affirmed at 'A+(tha)'.

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 the bridging loans from banks, which CP ALL used to finance its acquisition of Makro.

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 to CP ALL's existing secured bridging loans and secured bonds issued in October 2013, which represent more than 90% of CP ALL's total debt. CP ALL plans to refinance the remaining bridging loans with term loans from banks and/or bonds with a similar secured basis.

KEY RATING DRIVERS

Dominant Market Position: CP ALL is the largest operator in Thailand's convenience store business, with more than 7,000 stores nationwide. It commands a market share of approximately 60% of the stores, far above the second-largest. CP ALL is very likely to maintain its dominant position despite high competition. It is supported by its larger network and coverage, as well as 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 brand for convenience store chains. The company was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store being 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 sole market leader in Thailand's modern wholesale food retail market, represents CP ALL's first foray into this segment. This should also enlarge and widen its customer base. CP ALL has become the largest food retail company in Thailand following the acquisition of Makro.

Defensive, but Strong Growth: CP ALL benefits from the "defensive" cash flow nature of the sector, where the product offerings are essential to everyday life, with low revenue and margin volatility, while the growth potential is underpinned by Thailand's immature market for modern food retail. The expected sharp sales growth in 2014 will be driven partly by full-year consolidation of Makro. CP ALL's strong growth over the medium term is likely to continue, propelled 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 cash flow generation, its high financial leverage after the Makro acquisition is likely to improve over the next four to five years. While Makro's more aggressive expansion plan may result in negative free cash flow (FCF) in 2014, Fitch expects the deleveraging should be only slightly delayed, with funds flow from operations (FFO)-adjusted net leverage to reduce to 5.0x-5.5x by 2015 and to below 3.5x by 2017 (2013: 8.5x).

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 A positive rating action over the next 12-24 months is unlikely due to the company's high financial leverage.