Sept 16 (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 a 'A+(tha)' National Long-Term Rating.
The bonds, which will total up to THB40bn, will be issued in eight tranches due in 2016, 2018, 2020 and 2023. 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, 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 with a similar secured basis.
KEY RATING DRIVERS
Dominant market position: CP ALL is Thailand's largest convenience store operator, with a market share of approximately 60% of stores, far ahead of its nearest rival. It operates more than 7,000 7-Eleven stores nationwide under an area licence agreement for Thailand with 7-Eleven, Inc., USA. CP ALL is likely to maintain its dominant position despite intense 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.
Diversify to wholesale: The acquisition of Makro, the sole player in Thailand's modern wholesale food retail market, represents CP ALL's foray into this segment. CP ALL will become the largest food retail company in Thailand following the acquisition.
Defensive but strong growth: CP ALL benefits from the defensive cash flow nature of the sector, where products are essential to everyday life while growth potential is underpinned by Thailand's less than mature market for modern food retail. Fitch expects strong sales growth in 2013-2014, driven partly by the addition of sales from Makro. CP ALL's strong growth over the medium term is likely to continue, propelled by its openings of new stores and like-for-like sales growth.
Weak credit metrics: The leveraged buyout of Makro leads Fitch to expect that funds flow from operations (FFO)-adjusted net leverage will increase to about 8.2x in 2013 (2012: net cash), given only a half-year consolidation of Makro in 2013. However, the agency expects likely strong growth in operating cash flow and positive free cash flow generation to gradually reduce FFO-adjusted net leverage to below 5.0x by 2015 and to below 3.5x by 2017.
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 above 5.0x in 2015 and above 3.5x in 2017
- A deterioration in EBITDAR margin to below 8.5% on a sustained basis (2012: 11%)
- 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.