Bangkok--30 Jun--Fitch Ratings
Fitch Ratings (Thailand) Limited has placed BTS Group Holdings Public Company Limited's (BTS Group) and Bangkok Mass Transit System Public Company Limited's (BTSC) National Long-Term Ratings of 'A(tha)' on Rating Watch Negative (RWN) following BTS Group's announcement of its investment in Bangkok's new urban rail projects. On 16 June 2017, BTS Group signed the concession contracts - via its 75% stake in BSR Joint Venture (BSR) - for the MRT Pink Line Project and the MRT Yellow Line Project, with the Mass Rapid Transit Authority of Thailand (MRTA) at an estimated total project cost of about THB96 billion. A full list of rating actions is shown at the end of this commentary.
The company is exploring options with regards to the financing structure of the two projects, which includes a mix of debt and equity financing. It expects to use non-recourse project-level debt for the debt portion, and is evaluating a number of funding alternatives for its share of equity. As per the concessions, BTS Group has an obligation to inject THB21 billion of equity for its 75% stake in the two mass-transit projects. Under these concession contract terms, BSR is required to achieve financial closure within 120 days from the signing date.
The RWN reflects the uncertainties associated with the final financing structure, amidst limited financial flexibility. The limited rating headroom of BTS Group and BTSC reflects additional financing costs associated with BTSC's agreement to supply and install an electrical and mechanical system (E&M) for extensions to Bangkok's Green Lines, through to the financial year ending 31 March 2020 (FY20).
The agency expects to resolve the RWN once the details of the financing structure at the projects are disclosed, including the funding option related to BTS Group's share of equity in these projects. The company plans to complete various transactions which will have an impact on its capital structure in the next 120 days, although a resolution of the RWN could take longer than the typical six-month period if their implementation is delayed.
In consideration of BTS Group's post-transaction capital structure, Fitch will consider whether the additional non-recourse project debt can be de-consolidated based on an assessment of containment of risks at the project level. Fitch will also only give credit for a clear and committed path towards non-debt funded cash inflows when assessing its share of equity funding.
KEY RATING DRIVERS
Low Rating Headroom: Fitch expects BTS Group's FFO-adjusted net leverage to remain higher than our negative rating guidance of 3.5x during FY17-FY20 (FY17: 5.3x). This is due mainly to its investment in the E&M system for the extensions to Bangkok's Green Lines Extensions through FY20. BTSC will have far less financial flexibility over the next two to three years as it incurs additional interest costs on debt to fund the E&M contract.
BTSC is financing the E&M project through long-term non-amortising debt, which matches the cash flows with this project. Additional interest costs incurred on further debt associated with the E&M systems project reduces its debt-service coverage from cash flow. As such, any significant increase in investments, weaker-than-expected cash generation in the medium term, or a debt structure that adds high debt-servicing costs could lead to negative rating action.
Leading Mass Transit Operator: BTS Group has a strong business position in Bangkok's mass-transit sector. The group's recent expansion plan should widen its operating networks, which strengthens its business profile. Its ridership market share as of August 2016 was 66% (Dark Green and Light Green Lines). A stronger business profile should be positive for the rating in the medium to long term. However, the near-term benefit could be offset by its weakening financial profile, as the mass-transit expansion requires large capex and a very long payback period.
BTS Group-BTSC Ratings Equalised: We rate BTS Group and BTSC on a consolidated basis, given the strong operating and strategic linkages between the parent and subsidiary as per Fitch's Parent and Subsidiary Linkage criteria.
DERIVATION SUMMARY
The ratings of BTS Group and BTSC, at 'A(tha)' are equalised, derived from the group's leading business profile in mass-transit and media businesses, which generally generate strong and steady cash flow to support the group's capex and investments – particularly in its property and service businesses in the medium term. When comparing BTS Group with the peers which have predictable and stable earnings due to low competition, i.e. Bangkok Aviation Fuel Services Public Company Limited (BAFS, A+(tha)/Stable) and Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), those peers achieved higher ratings as they present lower risk profile in terms of earnings visibility and financial leverage.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- EBITDAR margin of around 25%-30% for BTS Group and 38%-43% for BTSC over the next three years
- The mass-transit business to be granted O&M contracts for new Green Lines Extensions
- Capex of about THB13 billion for BTS Group and THB11 billion for BTSC over FY18-FY20, excluding the investments in associates and JVs, the E&M project, and Pink and Yellow Lines project
- Full payment for E&M project to be received in FY21
- Reducing dividend payment in FY18 onward as the committed dividend has been completed
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
The RWN will be resolved and a Stable Outlook assigned to the ratings on receipt of details of the financing structure for
the Pink and Yellow lines contracts, including the funding options related to BTS Group's share of equity in
these contracts, provided:
- FFO-adjusted net leverage of BTS Group to be sustainable at below 3.5x from FY21, as well as FFO net cash interest coverage to be sustained at above 3.0x for BTS Group or above 2.5x for BTSC.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
Factors that could lead to the downgrade of the ratings include:
- FFO net cash interest coverage at below 3.0x for BTS Group or below 2.5x for BTSC
- Larger-than-expected capex and investment, weaker earnings, or delayed payment for the E&M project leading to a slower-than-expected deleveraging and FFO-adjusted net leverage of BTS Group remaining above 3.5x in FY21
- A significant increase in business risks
LIQUIDITY
Sufficient Liquidity: BTS Group's liquidity is supported by a freely available cash balance and liquid investments (Fitch-adjusted) of THB21.7 billion at FYE17, which is enough to cover its short-term debt maturing over the next 12 months of THB14.5 billion. We expect BTS Group's FCF to be negative in FY18-FY20, but this should be supported by FFO of about THB2.5 billion - 3.5 billion per year, the ability to access the local debt market, available bank credit facilities (uncommitted) of about THB22.0 billion, and other investments (mainly ready-for-sales equity) of THB13.5 billion (Fitch- adjusted) at FYE17.
FULL LIST OF RATING ACTIONS
BTS Group Holdings Public Company Limited
- National Long-Term Rating of 'A(tha)' on RWN
Bangkok Mass Transit System Public Company Limited
-- National Long-Term Rating of 'A(tha)' on RWN
-- Senior unsecured debentures' National Long-Term Rating of 'A(tha)' on RWN