Bangkok--20 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has downgraded WHA Corporation Public Company Limited’s (WHA) National Long-Term Rating, and the National Long-Term Rating on its outstanding senior unsecured debentures to ‘BBB+(tha)’ from ‘A-(tha)’. Simultaneously, Fitch has affirmed WHA’s National Short-Term Rating at ‘F2(tha)’. The ratings have been removed from Rating Watch Negative (RWN), where they were placed in November 2014. The Outlook is ‘Negative’.
The rating actions follow the company’s announcement that it has acquired 92.88% of Hemaraj Land and Development Public Company Limited (Hemaraj).
Key Rating Drivers
Increasing Financial Leverage: The downgrade reflects a significant increase in the company’s financial leverage after the acquisition. Its consolidated financial leverage is likely to rise significantly in 2015-2016 because the final acquisition cost of THB41bn was about 78% financed via an acquisition loan. The company has committed to the lender of the acquisition loan that it would de-leverage to about the pre-acquisition level by mid-2017. The loan repayment plan includes the sale of non-core assets, sale of investment properties to real estate investment trusts and sale of some stakes in Hemaraj. The company also expects its capex and land acquisition to decrease in 2015-2016, partly as a result of cost savings following the integration with Hemaraj.
Asset Disposal Uncertain: The outlook revision reflects the uncertainty inherent in the company’s de-leveraging plan. Most of the sources of funds for the debt repayment will come from asset disposals, which are subject to market conditions that could affect the valuation and timing of the disposals.
Change in Business Risk: The acquisition will see WHA expand into industrial estate and facilities development, which Fitch considers to have a higher business risk than the company’s existing operations in built-to-suit warehouses for rent. This will be partly balanced by the addition of Hemaraj’s utilities service business - mainly water-related services for clients in industrial estates - its ready-built factories and warehouses for rent as well as dividend contribution from its power business associates. These are likely to increase the proportion of recurring income to WHA and mitigate the volatility of revenue from land sales. The acquisition of Hemaraj also helps WHA to secure a large land bank in strategic locations and diversify the company’s customer base to those in industries such as petroleum, automotive and electronic.
Structural Subordination: Senior unsecured debt of WHA could be structurally subordinated to the acquisition loan. The borrowers of the acquisition loan are WHA and WHA Venture Holding Company Limited, a subsidiary of WHA and a direct shareholder of Hemaraj. The acquisition loan is also secured by shares of Hemaraj. This gives the lender of the acquisition loan more control over and a better access to Hemaraj’s cash flow than WHA’s senior unsecured creditors. Fitch will review the rating on WHA’s senior unsecured debt after the borrowing structure and flow of debt repayment are confirmed.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Consolidation of Hemaraj to increase WHA’s revenue by more than 100%;
- A significant increase in debt from acquisition loan.
Rating Sensitivities
Negative: Future developments that may, individually or collectively, lead to negative rating
action include:
- The consolidated FFO adjusted leverage at above 5.5x on a sustained basis, and/or
- The business risk of the integrated entity deteriorating from the pre-acquisition level.
Positive: Future developments that may, individually or collectively, lead to the revision of the Negative Outlook to Stable include:
- The consolidated FFO adjusted leverage at below 5.5x on a sustained basis, and/or
- The business risk of the integrated entity maintained at the pre-acquisition level.