Bangkok--4 Dec--Fitch Ratings
Fitch Ratings (Thailand) Limited has today revised Thailand-based Regional Container Lines Public Company Limited's (RCL) Outlook to Negative from Stable on its THB2.5bn senior unsecured amortising debentures due 2009, and simultaneously affirmed its National Long-term at 'BBB+(tha)'. The Outlook revision reflects RCL's weakening performance due to high oil prices and its limited ability to increase freight rates during the down cycle. In addition, projected recessions in the US and Europe, as well as slower growth in Asia in 2009, could result in a sharp reduction in global trade flow, impacting volume and freight rates. This could further weaken RCL's performance and financial position, prolong its de-leveraging in the coming 24 months and reduce its financial flexibility.
RCL's 9M08 results showed a significant deterioration in profitability and financial leverage. Its EBITDAR margin plunged to 12.5% in 9M08 from 23.9% in 2007, while its net debt to EBITDA ratio rose to 4.6x from 1.7x. Its total debt to total capitalisation was, however, down to 32.6% at end-September 2008 from 33.7% at end-2007.
The pressure on margins should ease in 2009 in light of softening oil prices, although freight rates are likely to stay weak. Given the committed capital expenditures of about THB3.0bn to be paid in late 2008-2009, RCL's consolidated debt is likely to increase during this period. Its net debt to EBITDA ratio may rise to 5.0x-5.5x during 2008-2009 from the range of 1.5x-2.0x in 2005-2007, while its net adjusted debt/EBITDAR ratio is expected to increase to 6.0x-6.5x from 3.0x-4.0x during the same period. Nevertheless, with only remaining committed capital expenditures of THB1.5bn in 2011 and the expected recovery in the EBITDA, net debt to EBITDA ratio and net adjusted debt to EBITDAR ratio forecast to significantly improve to 2.0x-3.0x and 4.0x-5.0x, respectively, after 2009. RCL's liquidity is still adequate. At end-9M08, RCL had cash balance of THB3.6bn while its undrawn committed banking facilities were about THB3.8bn.
The rating is underpinned by RCL's established market position in the intra-Asian container shipping industry as supported by its extensive network coverage in the Asia Pacific region, a relatively large fleet of young vessels, and its frequent sailing schedule. RCL's balanced business mix between the feeder service (Shipping Owned Container) and the liner service (Carrier Owned Container) partially mitigates its exposure to the cyclical nature of the shipping industry. Although the tonnage oversupply remains a concern with the estimated average global capacity growth of 14.5% p.a. during 2008-2010, such estimated growth of the smaller capacity ships mostly used in Asia is only 7.4% p.a. while the intra-Asian trade flow is expected to remain stronger than the cross-continent trade flows.
A failure of the recovery of freight spread and EBITDA by H209, as well as a prolonged or deeper-than-expected industry downturn could adversely affect the rating. On the other hand, RCL's ability to generate and manage cash flow through the down cycle shown via consistent improvement in profitability and financial leverage will stabilise the outlook of the company.
Contacts: Somruedee Chaiworarat, Bangkok, +662 655 4762; Lertchai Kochareonrattanakul, Bangkok, +662 655 4760; Vincent Milton, Bangkok, +662 655 4755.
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.
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