Bangkok--16 Mar--TRIS Rating
TRIS Rating has assigned a rating of "BBB+" to the proposed issue of up to Bt5,445 million in senior unsecured debentures of TPI Polene PLC (TPIPL). At the same time, TRIS Rating has affirmed the company and existing senior unsecured debenture ratings of TPIPL at "BBB+". The outlook remains "stable". TPIPL plans to use Bt3,000 million of the proceeds from the new debentures to refinance the company's existing bonds (TPIPL165A). The remainder will be used for working capital and other investments.
The ratings continue to reflect TPIPL's strong competitive position in the domestic cement market, leading status in LDPE homopolymer (LDPE) and LDPE copolymer (EVA), product diversification, and moderate financial leverage. The ratings are, however, partially offset by the cyclical nature of the building materials and the petrochemical industries, exposure to fluctuations in coal prices, the company's short record in accessing financial markets after debt rehabilitation, and an expected rise in its financial leverage due to aggressive investment plans.
The "stable" outlook reflects the expectations that TPIPL's strong market position in the cement segment will continue and operating performance of its plastic segment will gradually recover. The power segment should help enhance overall profitability and cash flow base, and also offset volatility of the plastic segment. TRIS Rating expects TPIPL's relationship with financial institutions should improve over time. The debt to capitalization ratio should stay below 40% over the next three years.
The rating or outlook could be revised downward if the debt to capitalization ratio continues to increase and exceeds 40% or if the funds from operations (FFO) to total debt ratio falls below 5% for an extended period. The events such as further delays in the government projects, lower-than-expected performance of the power plants or aggressive debt-funded investments would hurt TPIPL's financial profile and the company's ratings.
Conversely, TPIPL's ratings or outlook could be revised upward if TPIPL's projects operate successfully and the company strengthens its financial profile with solid cash flow generation and a substantial decrease in the debt. These could be seen by FFO to total debt ratio sustaining at around 15% and the debt to capitalization ratio maintaining below 30%.
TPIPL was founded by the Leophairatana family in 1987. As of December 2015, the family owned approximately 56% of the company's shares. The company operates in three main industries: cement (mainly cement and concrete products), plastics (LDPE and EVA), and electrical power. Total revenue in 2015 totaled Bt28.3 billion. Revenue from the cement segment accounted for 69% of the total revenue, while the plastic segment and the power segment represented about 24% and 6% of the total revenue, respectively.
TPIPL's business profile is moderate. The company is the third-largest cement producer in Thailand with a production capacity of nine million tonnes per annum. The company's cement market share by capacity has been staying at about 18% for the past several years. Its fourth cement plant with the capacity of 4.5 million per tonnes, started operation in January 2016. TPIPL's cement production is vertically integrated, starting from clinker to cement, mortar, concrete, concrete roof tile, and fiber cement. The integrated cement business offers economies of scale and a competitive cost structure.
TRIS Rating views that TPIPL's new cement plant project poses a medium-term market risk for TPIPL. If the domestic demand for cement remains sluggish, TPIPL's large capacity expansion of cement will aggravate an industry oversupply situation and intensify price competition. However, this risk is partially tempered by TPIPL's strong market position and the accelerated approval process for new government-sponsored infrastructure projects.
TPIPL is one of Thailand's leading LDPE and EVA producers, with a production capacity of 158,000 tonnes per annum. In 2015, TPIPL held about 20% market share by capacity for LDPE. TPIPL is the only EVA producer in Thailand. The company mainly focuses on EVA products for export markets. TPIPL's business risk in the plastic segment reflects the exposure to a single ethylene supplier, price volatility in petrochemical products, challenges from substitution products, technological changes, and global competitors. TPIPL's ratings reflect benefits from business diversification, in which an exposure to domestic economy from cement operation is partially counterbalanced by revenue from EVA exports.
TPIPL's ratings are partially constrained by the company's short record in accessing funding from financial markets after it exited the debt restructuring process. Its loan defaults and records of debt restructuring during the country's financial crisis in the past require the assessment of the company's credit risks on a conservative approach.
TPIPL's financial performance in 2015 continued to weaken due largely to an ongoing slowdown in demand for building materials. In contrast, TPIPL's plastic segment reported improving profits and its two power plants, totaling 73 MW, have started generating revenue and had high profit margins. TPIPL's total revenue fell by approximately 4.5% year-on-year (y-o-y) to Bt28,381 million in 2015. The operating margin (before depreciation and amortization) remained low at 8.9%, flat compared with the last year.The declining profit margin in the cement segment was partially offset by a rebound in performance from the plastic segment and high profitability from the power generating segment. Interest payment increased substantially in 2015, due to the large investments made during the past three years. As a result, the company's cash flow and liquidity deteriorated. TPIPL's funds from operations (FFO) in 2015 dropped by 36.5% y-o-y to Bt1,540 million. The FFO to total debt ratio fell to 4.1% 2015 from 8.8% in 2014.
In 2015, TPIPL's debt to capitalization ratio rose to 40.2%, consistent with TRIS Rating's projection. TPIPL's debt profile changed significantly after the company issued a sizeable number of bonds to refinance loans from financial institutions last year. The bond portion increased from 28.9% of the total outstanding debts in 2014 to 78.4% in 2015. The large portion of bond reflects concentrated source of funds and rising liquidity risk from series of bond bullet payments in the future.
Going forward, TRIS Rating maintains the view that TPIPL's performance will recover, driven by improving construction industry and new income streams from its invested projects, such as the fourth cement plant and a planned increase in contracted capacity of Refuse-derived fuel (RDF) power plant with Electricity Generating Authority of Thailand (EGAT) to 163 MW in 2017. Annual revenue is expected to reach Bt40 billion over the next three years. Due to an increasing contribution from the power segment, TPIPL's cash flow is expected to grow and be more stable. TRIS Rating forecasts that FFO will rise to Bt4,000-Bt5,000 million per annum over the next three years and the FFO to total debt ratio will improve and stay above 15%. However, the downside risks in TPIPL's financial performance may stem from delays in the government infrastructure projects, coupled with increasingly intense competition due to new cement supplies.
The debt to capitalization ratio is expected to fall below 40% over the next three years according to TPIPL's debt repayment schedule. After refinancing a bond in 2016, debt repayments will be about Bt3,700 million in 2017 and increase to Bt5,700-Bt6,500 million per year during 2018-2020. The debt repayments are larger than TRIS Rating's forecasts of Bt4,000-Bt5,000 million in FFO per annum. This implies a probability that TPIPL may choose to refinance part of its outstanding bonds, and thus make the debt decline more slowly than expected. TRIS Rating expects TPIPL will keep its debt to capitalization ratio below 40% in order to maintain its "BBB+" ratings.
TPI Polene PLC (TPIPL)
Company Rating: BBB+
Issue Ratings:
TPIPL165A: Bt3,000 million senior unsecured debentures due 2016 BBB+
TPIPL177A: Bt3,000 million senior unsecured debentures due 2017 BBB+
TPIPL187A: Bt2,000 million senior unsecured debentures due 2018 BBB+
TPIPL188A: Bt3,000 million senior unsecured debentures due 2018 BBB+
TPIPL191A: Bt3,000 million senior unsecured debentures due 2019 BBB+
TPIPL198A: Bt2,750 million senior unsecured debentures due 2019 BBB+
TPIPL201A: Bt3,000 million senior unsecured debentures due 2020 BBB+
TPIPL208A: Bt2,205 million senior unsecured debentures due 2020 BBB+
TPIPL218A: Bt3,600 million senior unsecured debentures due 2021 BBB+
TPIPL228A: Bt4,000 million senior unsecured debentures due 2022 BBB+
Up to Bt5,445 million senior unsecured debentures due within 2023 BBB+
Rating Outlook: Stable