Bangkok--5 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has today downgraded Thoresen Thai Agencies Public Company Limited (TTA)’s National Long-term senior unsecured rating to ‘BBB+(tha)’ from ‘A-(tha)’ (‘A minus (tha)’). The Outlook is Stable.
The downgrade reflects the Thailand-based company’s weakening financial leverage as a result of the deteriorating performance of its core businesses and a substantial increase in its debt level due to several recent acquisitions. While its performance is expected to gradually improve over the next 12 months, it is likely to remain weak. In addition, TTA has a large dry bulk vessel renewal program, and possible acquisitions over the next 12-24 months. This could result in TTA sustaining higher financial leverage than the levels over the last five years.
TTA’s rating is supported by its long expertise and established position in South-East Asia in both dry-bulk shipping and off-shore marine services. It also reflects TTA’s diversification into non dry-bulk shipping businesses to cushion the company against any cyclical downturn in the shipping industry. For the past two years, contributions from non-dry bulk shipping have increased to about 40% of TTA’s consolidated EBITDA, compared to 10%-15% previously.
Nevertheless, the rating is constrained by the cyclical, volatile, and fragmented nature of the dry-bulk shipping industry. The outlook on freight rates remains weak over the next 12-18 months given imminent oversupply risk in 2011-2012. While TTA’s more diversified business model helps to reduce the cyclicality and uncertainty of cash flow in the long term, this comes at the expense of higher financial leverage.
In 9MFY10, offshore marine services saw a 33% yoy fall in revenues due to lower than expected utilization of its drilling rigs and sub-sea engineering fleet. Meanwhile, freight income continued to weaken even though freight rates showed some improvement. The only positive growth came from contributions by TTA’s subsidiaries -- Baconco (a Vietnam-based fertilizer trader and manufacturer) and UMS (a coal and logistics company) -- which were both acquired by TTA in 2009. Both companies accounted for 24.4% of TTA’s consolidated revenues. In 9MFY10, TTA’s total revenues fell by 15.6% yoy while EBITDA dropped 34.6% yoy.
The expected turnaround in sub-sea engineering services and the launch of UMS’ coal briquettes are likely to be the key growth drivers in FY11. Nevertheless, the performance of dry-bulk shipping is expected to be flat in FY11 before improving in FY12, as result of the fleet renewal program starting from FY10.
TTA turned into a net debt position of THB7.7bn at end-June 2010 with its net debt to last 12-month (LTM) EBITDA of 2.7x from a net cash position at FYE09. Besides a weakening EBITDA and a large increase in debt to finance its fleet renewal program and acquisitions, TTA’s deteriorating leverage was partly a result of the consolidation of UMS’ financial statements since late December 2009. Given its continued fleet renewal program over the next 12-24 months, Fitch expects TTA’s consolidated net debt/EBITDA to stay in the range of 2.2x-2.7x.
The Stable Outlook reflects Fitch’s expectation that TTA will achieve more diversification and stabilization of cash flows while maintaining the moderate financial leverage and sufficient liquidity at the level consistent with the current rating. Sustained financial leverage, measured by Net Debt/EBITDA, of no more than 2.0x with more balanced and diversified cash flows would be positive for the rating. However, the rating may be negatively affected if there is no recovery in its core businesses, while continuing its large capex and investments over the next 12-24 months, which may lead to a sustained high financial leverage of more than 3.0x.
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.