Bangkok--30 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has downgraded Thoresen Thai Agencies Public Company Limited's (TTA) National Long-Term senior unsecured rating to 'BBB(tha)' from 'BBB+(tha)'. The Outlook is Stable.
The downgrade reflects Fitch's view that TTA's high financial leverage would persist within a 4.0x-5.5x range over the next three years, due to a prolonged downturn in the dry-bulk shipping industry and limited contribution from its newly invested integrated coal and logistics businesses. The Stable Outlook reflects Fitch's expectation that the company is likely to maintain its credit metrics consistent with the current rating over the medium term. Despite expected weak freight rates, the company's successful cost-cutting programme and ongoing diversification should help maintain its earnings and cash flow.
TTA's performance on dry-bulk shipping continued deteriorating in the financial year ended September 2011 and in Q1 FY12. Although its offshore services have shown an improvement, its overall EBITDA in FY11 decreased 18.1% with the EBITDA margin falling to 13.4% from 16.1% in FY10. In Q1 FY12, the downturn in dry-bulk shipping, together with disrupted operation at its coal logistics subsidiary, Unique Mining Services Public Company Limited, due to the impact from the Thai floods in October-November 2011, caused the company's EBITDA to fall 39% yoy with an EBITDA margin of 10.8%. TTA's financial leverage measured by net debt to last-12-month (LTM) EBITDA worsened to 4.8x at end-December 2011 from 1.8x at FYE10.
The rating is constrained by the cyclical, volatile, and fragmented nature of the dry-bulk shipping industry. The industry has been in a downturn since late-2008 and the downturn is likely to persist over the next two to three years, as oversupply continues to put pressure on freight rates.
The rating is supported by TTA's increased diversification to non-dry bulk shipping businesses i.e. the integrated coal and logistics businesses. Turnaround in the offshore marine service business should partly help compensate some earnings loss from dry-bulk shipping in 2012-2013. Over the longer term, new investments in non-dry bulk shipping should create synergies with dry-bulk shipping as well as help reduce cyclicality and stabilise cash flows.
The rating also takes into account TTA's long experience and established position in the south-east Asian market in both dry-bulk shipping and offshore marine services.
Improving cash flow generation from core and new businesses resulting in a decline in financial leverage, as measured by net debt to EBITDA, below 4.0x on a sustained basis would be positive for the rating. On the other hand, negative rating action may arise from a deeper- and longer-than-expected downturn in dry-bulk shipping beyond 2014, an interruption in the turnaround of offshore marine services, as well as continued large capex leading to financial leverage above 6.0x on a sustained basis. In addition, deterioration in liquidity i.e. fixed charge coverage below 1.5x and/or negative action from bank lenders may also adversely affect the rating.