Bangkok--19 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has today upgraded the National Long-term rating on Thailand’s Regional Container Lines Public Company Limited (“RCL”)’s senior unsecured bonds to ‘BBB+(tha)’ from ‘BBB(tha)’. The Outlook on the rating is Stable.
The rating upgrade is mainly supported by RCL’s stronger-than-expected financial position over the last two years, lower fleet expansion and capital expenditure in the next three years, and the improving recovery prospect of its senior unsecured debt. Due to the strong tonnage demand and the upturn in the shipping cycle between 2004 and 2005, RCL’s net debt/last-12-month (“LTM”) EBITDA fell substantially to 1.4x in 2005 from 3.9x in 2003, although it increased slightly to 1.8x in H106 (the six-month ended 30 June 2006) in light of softening freight rates. When adjusted for charter expenses, its adjusted net debt/LTM EBITDAR also declined to 3.3x in 2005 from 5.6x in 2003 and slightly rose to 3.6x in H106. Given RCL’s moderate capex plan of around THB3.0 billion over the next three years, its net debt/EBITDA should remain at less than 2.0x whereas adjusted net debt/LTM EBITDAR is expected to be around 3.5x to 4.0x during 2007.
The agency notes that despite the high proportion of secured debt to total debt at 75% at end-June 2006, the recovery prospect of its senior unsecured debt has improved substantially. RCL’s secured debt/total capitalisation gradually declined to 27% at end-June 2006 from 55% at end-2001 while its secured debt/LTM EBITDA significantly dropped to 1.4x in 2005 from 4.2x in 2001 and stood at 1.5x in H106. Given the expected slowdown in fleet expansion and capex budget over the next few years, RCL’s secured debt/total capitalisation should remain at around 25% at end-2006 and gradually decline thereafter. Its net book value of fixed assets/secured debt was strong at 3.0x at end-June 2006, compared with 1.5x at end-2001. Also, a provision on negative pledge of certain vessels should provide some comfort to the unsecured debentures holders.
The rating also reflects RCL’s leading market position in the regional container shipping industry, underpinned by its established extensive network coverage in the Asia-Pacific region, a large fleet of relatively young vessels and the frequent sailing schedule. The company has been a market leader in the common feeder segment for many years, with the largest market share in major ports in Australia, Malaysia, Thailand, Philippines and Cambodia. Also, the company is well-positioned to capture the increased business on its newly launched routes. In 2005, RCL introduced three new service routes, including Chennai-Singapore, Bangkok-Japan and Asia-Middle East. Although the feeder or Shipper Owned Container (“SOC”) trade volume and profit margin are highly sensitive to global growth, a balanced mix of SOC and liner or Carrier Owned Container (“COC”) services should partly mitigate the company’s exposure to the volatility in global tonnage demand for container shipment. COC business primarily provides direct cargo shipment to various ports within the Asia-Pacific region, which exhibits stronger growth prospects than the rest of the world.
Credit risks include the cyclical nature of the shipping industry and the highly volatile freight rates. Fitch expects that freight rates will soften further in 2007, particularly for the large vessel segment, due to the supply of new container ships. Also, the company is exposed to rising pressure on its operating profit margin, mainly due to sustained high fuel costs and charter expenses. The recent merger and acquisition activities in the container shipping industry may lead to the large operators cutting rates to maintain their market share, putting more pressure on the profit margin of smaller container ship operators such as RCL.
Contacts: Soamsiri Chadavadh +662 655 4753; Lertchai Kochareonrattanakul +662 655 4760; Vincent Milton +662 655 4759
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with sub- or low-investment grade international sovereign 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.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com . Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.