Bangkok--Nov 24--Moody's Investors Service
Moody's Investors Service has assigned a Ba3 corporate family rating to TRUE Corporation Ltd. (TRUE) and a B2 senior unsecured rating to its proposed 7-year US$225 mln bonds. The outlook for both ratings is stable. The proceeds of the bonds will be used to refinance TRUE's existing secured domestic bonds.
The Ba3 rating reflects TRUE's a) unique integrated business model for
providing fixed-line, broadband and cellular operations in Thailand, b) leading position in BMA (Bangkok Metropolitan Area) in fixed-line and broadband services; ability to offer bundled services beyond its traditional fixed-line services helps reduce line loss and convergence risk, c) growing cellular operations, via TA Orange, and d) commitment to de-leverage is supported by projected positive free cash flow and scheduled loan amortization in the next 2 years.
On the other hand, key factors limiting the rating include a) a competitive cellular market, b) relatively high financial leverage - versus its key competitors - places it in a weaker competitive position, and c) exposure to regulatory and liberalization challenges.
The B2 senior unsecured bond rating has factored in material effective
subordination risks where 95% of TRUE's debt is on a secured basis. Moody's says structural subordination is also apparent, but further mitigated by the operating cash flow generated at the TRUE level.
TRUE is Thailand's leading and unique integrated telecoms operator with
55% and approximately 85% of the fixed-line and broadband markets in BMA respectively. Moody's expects non-voice wireline revenue, notably from multimedia and broadband, to offset the falling trend in voice revenue in the next 2-3 years. Its #1 broadband position and partnerships with key content providers for richer content will reinforce this trend.
Its cellular operations under TA Orange have been growing fast since 2002
and achieved 14.4% market share as of June 2005, making it Thailand's 3rd largest mobile operator. It will benefit from a growing, albeit moderating market, and can offer differentiated products by leveraging synergies with TRUE to further capture such growth. This capability also represents a key competitive advantage for TRUE.
Management's commitment to reduce debt has provided further support to
the rating. Moody's expects its de-leverage plan to be met by projected free cash flow, including an annual capex plan of Bt8 bln over the next 2 years. Gradual debt reduction should see its financial metrics improve over this period with RCF/adj. debt of 15-23% and FFO interest coverage of 3.5-4.5x.
On the other hand, TA Orange is susceptible to competitive pressures as
it has a smaller subscriber base, market share and weaker financial profile versus AIS (unrated) and DTAC (Ba2/review for upgrade). TRUE's higher financial leverage (RCF/adj. debt of 15% and adj. debt/EBITDA of 4.9x) and debt burden (Bt84 bln or US$2 bln) as of June 2005 subject it to the risks of greater competition, if existing operators or new operators accelerate network expansion and pursue more aggressive strategies. Such concern is partially mitigated by TRUE's integrated
business model, ability to offer bundled services, leadership in the broadband market and expanding cellular subscriber base.
Moody's says ongoing reform and liberalization of the telecoms market
would add uncertainty to the operating environment for TRUE, which is subject to high concessionary costs. The potential issuance of more new licenses could intensify competition. The issue of concession conversions is unlikely to be settled in a short time and TRUE is under no obligation to convert its license. Should such a conversion require a one-off significant payment, thereby pressuring its liquidity and financial profile -- but which Moody's does not expect -- then it could have negative rating implications.
A total 13% of TRUE's debt (primarily at the TA Orange level) was denominated in foreign currency as of 30 June, 2005. However, Moody's views this risk as manageable, given that 80% of the principal and most of the interest of its USD exposure are hedged. Following the new bond issue, TRUE will extend its debt maturity profile, thereby lowering refinancing risk. A total 30% of its debt will mature in FY2006-08, and the rest from FY2009 onwards.
TRUE's liquidity profile is considered adequate, reflecting gross cash
flow of Bt17 bln and cash on hand of Bt6 bln. These amounts are sufficient to cover its capex and scheduled debt repayments. Alternate liquidity - in the form of short-term uncommitted facilities - is provided by a group of financial institutions, including international banks.
In accordance with its bank loan agreement, there are limitations on TA
Orange's ability to upstream any cash to TRUE. Under a sponsor support agreement, TRUE is obligated to provide financial support to TA Orange of Bt13 bln, should cash flow prove insufficient for normal operations, debt repayments, or any regulatory charges due to concession conversion. Moody's therefore assesses TRUE financial profile on a consolidated basis. The projected positive free cash flow and cash build-up at TA Orange is likely to reduce the need for such potential support.
TRUE is considering the acquisition of 100% of UBC, Thailand's leading
nationwide cable TV operator, for US$300 mln, which would be funded by a 9-month bridging secured bank facility. TRUE plans to use UBC's US$100 mln existing cash on hand to partially pay down this debt and refinance the remainder with longer-term debt. TRUE already owns 40.5% of UBC. Moody's views the acquisition as likely to enhance TRUE's market position because UBC has a dominant position with key competitive advantage in providing premium content. UBC's business is profitable and has generated positive free cash flow.
Completion of the transaction is expected by March 2006, subject to
shareholder approval. Moody's rating assumes the acquisition will proceed as described. Anything substantially different and involving a material rise in debt or reduction in cash flow could lead to negative rating pressure.
CP group is the key shareholder and owns 34% of TRUE. Its commitment to
provide support is demonstrated in the potential financial assistance and minimum shareholding in accordance with the sponsor support agreement for the debt of TA Orange. Moody's also understands that it is TRUE's policy not to provide any guarantees or undertake any transactions with CP group companies. The bond indenture also restricts dividend upstreaming.
Upward rating pressure could emerge if TRUE manages well its growth
strategy in cellular operations, resulting in a sustainable EBITDA margins at the current level and growth in free cash flow to reduce debt as planned. Key indicators for such improvements include RCF/adj. debt above 20-25% and FFO interest coverage above 4-5x. Greater certainty over regulatory reform - with benign outcomes - would also benefit the rating.
The ratings could undergo downward pressure if a) TRUE experiences a
significant deterioration in market share and ARPU - a scenario which could result from greater competition and further liberalization - pressuring EBITDA margins below 35%, b) TRUE fails to reduce financial leverage, such that RCF/adj. debt is less than 10% and FFO interest coverage is less than 2.5x. An unfavorable outcome from regulatory reform would also be negative for the rating.
Headquartered in Bangkok, Thailand, TRUE, formerly called TelecomAsia, is an integrated provider of fixed-line, broadband, internet and mobile services in Thailand. Revenue for FY2004 reached approx. Bt33 bln (U$805 mln). Key shareholders include CP group (34%) and Kfw (17%). CP group's key businesses include agriculture and food, retail and distribution as well as telecommunications.
Hong Kong
Anna Ho
Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121 End.