Bangkok--19 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has today assigned an expected National Long-term rating of 'BBB+(tha)' to Property Perfect Public Company Limited's (PF) THB520m 3-year senior secured debentures, with partial guarantee provided by Siam City Bank Public Company Limited (SCIB, 'A-(tha)'/Stable Outlook). The Outlook is Stable. The debentures will be secured by freehold land with an average appraisal value of THB884m, representing a value-to-loan ratio (VLR) of 170%. PF must maintain a VLR of at least 160% under the debentures covenant. The debentures will be partially guaranteed by SCIB with an amount of THB260m, or 50% of the principal. The proceeds from the debentures will be used for project development and working capital.
The rating reflects PF's strong brand recognition and long track record in Bangkok's prime residential market, especially in the large-scale development of single detached houses. The rating also reflects PF's improving financial position and earnings performance in recent years, although its financial leverage is likely to weaken over the next couple of years due to more land acquisition and project developments.
PF's rating takes into account the credit enhancement from a partial guarantee. According to Fitch's Partial-Credit Guarantee (PCG) rating methodology, a PCG helps to reduce the severity of loss given default. Considering the estimated amount of recovery based on the THB260m partial guarantee, the ratings of issuer and guarantor and their correlation, Fitch has assigned a two-notch uplift from PF's senior secured debentures. PF's bondholders expect to receive payment of principal and interest firstly from PF. In the event PF fails to meet the obligation of payment, the bondholders should receive payment of principal and interest from SCIB in a lump-sum of THB260m upon acceleration of payment. Investors should note that the guarantee provides that SCIB will have subrogation rights against PF once it has paid out any amount in connection with the guarantee and that SCIB's claim will be competing with all other unsecured debt of PF. While this could result in a lower recovery rate for the bondholders (in case the value of the pledged land is below the remaining liability of the debentures), the higher VLR as a result of lower remaining liability of the debentures should mitigate this risk.
The rating is constrained by the highly cyclical nature of the property industry. Given the economic recession and local political instability, leading to low consumer confidence, housing demand is likely to weaken for the next 12-18 months. The competition is expected to intensify, but likely only among large developers as most of the smaller ones are facing difficulties in seeking financing from banks. The real estate stimulus measures from the government, slower increase in new supply as well as downward interest trend may help boost declining sales.
The rating also reflects the non-recurring nature of project earnings as well as the unmatched timing of operating cash flows. This has led to PF's high working capital requirement and weak financial leverage during a period of project expansion or cyclical downturn, which is expected over the next 12-18 months.
PF reported operating EBITDAR of THB1.2bn in 2008, up 72.7% from 2007, thanks to higher sales due mainly to condominium sales and improved margins. PF's net debt decreased to THB4.7bn at end-2008 from THB5.4bn at end-2007 and THB6.3bn at end-2007. This, together with increasing EBITDAR, helped improve PF's financial leverage, as measured by net adjusted debt to EBITDAR, significantly to 3.9x at end-2008 from 7.7x at end-2007 and 18.3x at end-2006. However, the company projects capex for land acquisition of about THB1bn a year for the next three years after a slowdown in this spending during 2006-2007, while PF's earning performance over the next 12-18 months is likely to weaken in accordance with the weakening operating environment. PF's financial leverage is, therefore, expected to rise from the current level.
The Stable Outlook reflects Fitch's expectation that PF's strong brand recognition and long experience in the industry should help maintain its market competitiveness and financial position consistent with the current rating level over the medium term. Significant improvement in earnings performance and sustainable reduction in financial leverage would positively affect the rating while a prolonged industry downturn and weaker-than-expected financial leverage and liquidity position could negatively affect the rating.
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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