Bangkok--10 Mar--Fitch Ratings
Fitch Ratings (Thailand) Limited has today assigned a final National Long-term rating of ‘BBB+(tha)’ with a Negative Outlook to Property Perfect Public Company Limited’s (“PF”) THB450 million secured debentures with a maturity of two years, due February 2008.
The rating reflects the credit enhancement from the mortgage of freehold land, as well as a 50% principal guarantee (or up to THB225m) by Thai Military Bank Public Company Limited (“TMB”, rated ‘A(tha)’/Positive/‘F1(tha)’). The partial guarantee gives a two-notch uplift from PF’s secured rating (rated ‘BBB-(tha)’ (BBB minus(tha))/Negative). The proceeds from the debentures will be used for land acquisition for future project development and for working capital.
In the event PF fails to meet the principal and interest repayments, the bondholders should receive the payment from TMB in a lump-sum of THB225m upon acceleration of payment. The partial guarantee from TMB should reduce the loss to investors when a default occurs. Investors should note however that the guarantor has not waived any defence it may have under the debentures. This could include invalidity, illegality and unenforceability of the guarantee or debenture, although the likelihood of such a defence being used appears small. In addition, the guarantee provides that TMB will have subrogation rights against PF once it has paid out any amount in connection with the guarantee and that TMB’s claim will be competing with all other unsecured and unsubordinated debt classes of PF. While this could result in a lower recovery rate for the bondholders, the guarantor only has a second mortgage over the pledged security, which should mitigate the impact on the recovery rate.
PF’s stand-alone creditworthiness is relatively weak. The company is exposed to operational risks including an industry-wide slowdown, rising interest rates, a slowdown in inventory turnover due to more intense competition, construction delays and rising construction material costs. There are also concerns on PF’s liquidity and financial risks given the non-recurring nature of project cash flows and high leverage. Nonetheless, these risks are partly mitigated by the company’s strong brand recognition in Thailand’s single detached housing (“SDH”) market and its long experience in large-scale SDH development, as well as the credit enhancement from the collateral and partial guarantee.
At end-2005, PF’s net debt increased to THB6.8 billion from THB6.4bn at end-2004, while its net debt to EBITDA ratio weakened to 9.3x (2004: 8.2x), on the back of its project expansion, land acquisition and a dividend payout. While its SDH sales increased 20% year-on-year, EBITDA declined 5% yoy to THB733m in 2005, as margins were negatively affected by rising construction and advertising costs. Despite the improving trend, PF’s net debt to EBITDA ratio is likely to remain high for 2006, while reduced land acquisition and project expansion, together with expected stronger EBITDA growth, should help improve leverage to a more moderate level in 2007.
The Negative Outlook for the issue reflects PF’s current Outlook. The Outlook is based on PF’s vulnerability to a further slowdown in the industry. For the agency to consider an upwards revision in the rating Outlook, PF will need to show sustainable sales growth and improved leverage by end-2006.
CONTACT: Wasant Polcharoen, Lertchai Kochareonrattanakul, Vincent Milton, Tel: +662 655 4755
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
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