TRIS Rating has assigned a rating of “A” to the proposed issue of up to Bt15,000 million in senior debentures of Bangkok Expressway and Metro PLC (BEM). At the same time, TRIS Rating has affirmed the company rating of BEM at “A”. The outlook remains “stable”. The proceeds from the new debentures will be used to refinance parts of BEM’s long-term debt following its financial restructuring plan and finance its investments. The rating reflects BEM's strong business profile, supported by stable and reliable operating cash flow, and the growth prospects in the mass rapid transit (MRT) segment. These strengths are partially offset by the uncertainty over the concession renewal for the urban sectors of the expressway which will expire in 2020, and expected rise in financial leverage due to BEM’s large capital expenditure plan.
The “stable” outlook reflects TRIS Rating’s expectation that BEM will maintain its strong business profile and reliable cash flows from its two core lines of business. BEM's credit upside is limited, given the large capital expenditures planned over the next couple of years. A credit downgrade would result if there are any aggressive debt-funded investments which cause the ratio of total debt to capitalization to stay over 65% on a sustained basis.
BEM was established on 30 December 2015 through the amalgamation of Bangkok Expressway PLC (BECL) and Bangkok Metro PLC (BMCL). BEM was listed on the Stock Exchange of Thailand (SET) on 5 January 2016. BEM's major shareholder, as of April 2016, was CH. Karnchang PLC (CK), holding 28.16% of the shares.
BEM has three main lines of businesses: constructing and operating expressways, providing mass rapid transit service, and doing commercial development related to its expressway and metro networks. At the end of 2015, BEM reported revenue of Bt11,738 million, of which 75% was from the expressway segment, 20% from the metro segment, and 5% from the commercial development segment.
BEM built and operates the elevated Si Rat Expressway (the Second Stage Expressway System -- SES) and the Udon Ratthaya Expressway (Bang Pa In-Pak Kret Expressway), known as Sector C+. Both expressways were established under 30-year Build-Transfer-Operate (BTO) concessions awarded by the Expressway Authority of Thailand (EXAT). The SES, the extension of the SES (Sector D), and the Sector C+ concessions will expire in 2020, 2027, and 2026, respectively. In addition, BEM was awarded the concession for the Si Rat-Outer Bangkok Ring Road Expressway (SOE). The concession is a BTO concession, covering 30 years, including a construction period of up to 48 months. The SOE section is expected to open in August 2016.
During the past five years, the average daily traffic volume on the expressway network grew by an average of 3.2% per year. For the first quarter of 2016, the average daily traffic volume was 1.18 million trips per day. The average daily toll revenue was Bt25 million per day, up by 2.63% year-on-year (y-o-y). TRIS Rating believes that toll road usage will continue to grow moderately in the medium term, supported by ongoing urban sprawl, increases in the number of cars registered in Bangkok and the vicinity, and lower oil prices. However, there are uncertainties relating to the SES expressway concession (Sector A, B, and C) which is expiring in 2020 and subject to renewal. This will affect BEM's revenue stream as around 50% of its revenue is from operating the urban sector expressways.
BEM has been granted concessions for two mass rapid transit rail system projects by the Mass Rapid Transit Authority of Thailand (MRTA), including the M.R.T. Chaloem Ratchamongkhon Line (Blue Line) and the Purple Line. The Blue Line concession is a 25-year agreement beginning from 2 July 2004. The Blue Line is on a Public-Private Partnership (PPP) Net Cost agreement basis which BEM has rights to collect fare box revenue and undertake commercial development activities and bear risk on ridership. The Purple Line concession is under a 30-year agreement on PPP Gross Cost scheme. The MRTA paid for all the civil works while BEM invested in the mechanical and engineering (M&E) systems and the rolling stocks which the MRTA will gradually repay the M&E equipment to BEM in 10 years after BEM delivers ownership to the MRTA. BEM will provide operation and maintenance (O&M) services throughout the concession period.
During the past years, the Blue Line has experienced operating losses as ridership was less than projected. However, ridership on the MRT Blue Line has improved continuously during the past five years, supported by shifting demographic and population trends. There are now many more condominiums along the mass transit system lines. Ridership grew by an average of 8% per annum during the past five years. For the first quarter of 2016, the average daily ridership was 271,417 trips, up by 4% y-o-y. Average daily revenue of the Blue Line rose by 4.1% y-o-y to Bt6.81 million over the same period. The operation of the Purple Line and the Blue Line extensions will enhance growth in ridership.
BEM's financial profile is average. Its high profitability is weighed by its high financial leverage, reflecting the capital- intensive nature of the expressway and MRT businesses. For the first quarter of 2016, BEM's revenue increased by 3.6% y-o-y to Bt3,026 million due to the rise in both traffic volume and ridership. For the first quarter of 2015, the operating margin, or operating income before depreciation and amortization as a percentage of sales, remains high at 60.8%, driven mainly by the strong profit margin of the expressway segment. Under TRIS Rating's base-case scenario, BEM revenue is forecasted to grow by 10%-20% per annum during 2016-2018, supported by the organic growth of the existing expressway network and MRT systems, plus the opening of the SOE expressway and the Purple Line in mid-2016. The operating margin is expected to stay around 50%, taking into account the higher amount of remuneration BEM is committed to pay to the MRTA annually.
At the end of March 2016, BEM's total debt was Bt44,928 million, including provisions for land site acquisition in the expressway segment. The ratio of total debt to capitalization was 60.11% at the end of March 2016. TRIS Rating expects that BEM's debt will continue to increase based on TRIS Rating's assumption that BEM will invest around Bt15,000-Bt20,000 million in the MRT Blue Line Extension project during 2017-2018. BEM's total debt to capitalization ratio is expected to peak in 2017-2018 at around 65%-70%. TRIS Rating excludes a debt of approximately Bt20,000 million from the investment in the M&E systems and the rolling stock of the Purple Line, which is currently in CK's books, as this amount of debt is backed by the agreement with the MRTA that will be paid back in 10 years.
BEM's liquidity is acceptable, supported by its reliable operating cash flow and the financial flexibility from its investments in associated companies. For the first quarter of 2016, the funds from operations (FFO) to total debt ratio was 3.63% (non-annualized) while the earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage ratio stayed at 4.94 times. Over the next 12-18 months, BEM has debt service obligations of approximately Bt10,000 million of which BEM plans to refinance Bt7,000 million of debt by the end of 2016. BEM has planned investments of Bt11,000 million, mainly for the SOE project and an additional investment in the Blue Line. The sources of funds will include expected FFO of at least Bt5,400 million per annum, available bank credit facilities of approximately Bt4,000 million for its projects, plus cash and cash equivalents of Bt3,446 million at the end of March 2016. In addition, BEM has financial flexibility from its investments in TTW PLC and CK Power PLC, totaling Bt11,472 million as of 17 May 2016.
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