Bangkok--13 Nov--Fitch Ratings
Fitch Ratings says that the improvement in the Thai regulatory framework following the issuance of 3G licences resulted in rating upgrades for the two largest Thai mobile phone operators. However, competitive pressures are likely to increase and free cash flow (FCF) remains negative as Thai telecom operators transition to the new licence system.
Obboon Thirachit, Fitch's Bangkok-based telecom analyst, explains in Q&A format below Fitch's latest views on the Thai mobile sector and the rationale behind the recent rating upgrades.
Q: Fitch recently upgraded the National Ratings for Advanced Info Service Public Company Limited (AIS) and its 3G subsidiary Advanced Wireless Network Company Limited (AWN) to ‘AA+(tha)’ from ‘AA(tha)’, and Total Access Communication Public Company Limited’s (DTAC) National Rating to ‘AA(tha)’ from ‘A+(tha)’ and its Issuer Default Rating to ‘BBB’ from ‘BBB-’. What were the main factors behind the upgrades?
A: The upgrades are based on our view that regulatory risks for Thai mobile telcos have improved after the operators were granted the 3G licences. We signalled our intention to upgrade these companies in October 2012 when the regulator completed the 3G spectrum auction. Our upgrades in October 2013 show that the benefits of the 3G licence system are now sufficiently certain to be reflected in higher ratings.
Q. What are the benefits to operators under the new 3G licensing system?
A. Firstly, private telecom operators will migrate their operations and subscribers to the new 3G licence system, which is more transparent and promotes a more level playing field compared to the concession agreements between the operators and government-owned telcos, which governed 2G operations. Under the new licence system, all telcos operate under common rules and regulations, governed by an independent regulator. Operators have been granted the right to operate the telecom frequency for 15 years and have full ownership of their assets. Under the 2G concession agreements, all network assets have to be transferred to their concession grantors.
In addition, the migration to the new licence system will help reduce private operators’ exposure to the legal and regulatory uncertainties that were characteristic of the concession system. Such risks included the pending investigation by the government into concession amendments, which could lead to significant claims by the government and/or the concession grantors; or the revocation of the concession agreement. These legal and regulatory weaknesses have been Fitch’s key credit concerns for the Thai telecoms sector and constrain the ratings of these operators.
Q: Fitch upgraded DTAC’s international ratings, but AIS’s ratings were unchanged. What is the reason behind that?
A: We rate AIS ‘BBB+’ on the international scale and continue to rate it higher than DTAC because of its superior margins and market position. However, before upgrading AIS’s international ratings to the ‘A’ category, we would expect the company to generate positive FCF and for its new 3G business to account for the dominant share of operating EBITDAR. However we believe these developments are unlikely to take place over the next 12-24 months.
Q: What other risks remain for Thai telcos?
A: Despite the better regulatory environment, we believe that the competition in the mobile sector is likely to increase. The major mobile operators are likely to target a swift migration of their operations and subscribers to the new licence system, so we expect an increase in tariff competition. The competition is likely to be intense for the medium- and low-end prepaid segment. Mobile operators may need to offer incentives such as large tariff cuts or handset promotions to accelerate the migration process, which could lead to further price competition and margin decline. In addition, the significant increase in capex to build the 3G network will lead to a negative FCF for operators for the next two years. Consequently operators’ financial leverage will increase.
Q: How would these risks impact the ratings of AIS and DTAC?
A: We expect the impact from competition and large investment to be manageable for the companies at their current rating levels. This is mainly due to their solid operating cash flow generation and large rating headroom, as our ratings take account higher competition and investment. The credit profiles of AIS and DTAC are likely to remain commensurate with their current ratings over the next three years, with FFO-adjusted net leverage ratio below 1.5x and 2.5x respectively. At end-9M13, AIS’s and DTAC’s FFO-adjusted net leverage ratios were solid at 0.33x and 0.89x respectively.