Bangkok--2 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Thailand-based retailer CP ALL Public Company Limited’s (CP ALL) senior unsecured bonds an ‘A(tha)’ National Long-Term Rating. Fitch has simultaneously affirmed the National Long-term Rating of CP ALL and its outstanding bond issues at ‘A+(tha)’ with Stable Outlook and the National Short-term Rating of CP ALL at ‘F1(tha)’.
The bonds, which will total up to THB18bn, will be issued in two tranches due in 2017 and 2020. The proceeds from the bonds will be used to refinance some of CP All’s existing bank loans. Unlike the company’s outstanding bond issues and most of its existing bank loans, which are secured by shares of Siam Makro Public Company Limited (Makro), this issue is unsecured.
Key Rating Drivers
Proposed Notes Notched Down: The proposed senior unsecured notes are notched down one level below CP ALL’s “A+(tha) National Long Term Rating due to the significantly large prior ranking debt, which was 6.2x EBITDA at 31 December 2014.
Leading Market Position: CP ALL is the largest operator in Thailand’s convenience store sector, with more than 8,000 stores nationwide. It has a domestic market share of about 60%, in terms of number of stores, far more than the second-largest operator. CP ALL is likely to maintain its leading position despite intense competition because of its large network and area of coverage, along with well-established functions such as logistics, supply and maintenance, staff training and development, to support its position.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
Diversifying into Wholesale: The acquisition of Makro - the market leader in modern food wholesaling stores in Thailand - was CP ALL’s first foray into the wholesaling business. This transaction both increases and broadens the company’s customer base to create Thailand’s largest company in the food retail sector.
Defensive, but Strong Growth: CP ALL benefits from the “defensive” cash-flow nature of the sector, which sells products essential to everyday life, with low revenue and margin volatility; while its growth potential is underpinned by Thailand’s immature market for modern food retailers. CP ALL’s strong growth over the medium term is likely to continue, propelled by the opening of new stores and like-for-like (LFL) sales growth, despite a negative LFL growth for 7-Eleven stores in 2014.
Weak Credit Metrics: CP ALL’s financial leverage is likely to improve over the next four to five years, given its expected strong cash-flow generation. Makro’s aggressive expansion plans caused negative free cash flow (FCF) in 2014. However, Fitch expects the deleveraging will be only slightly delayed with funds from operations (FFO)-adjusted net leverage to be reduced to 5.0x-5.5x by 2015, and to below 3.5x by 2017 from 6.9x at end-2014.