Bangkok--25 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has today assigned an expected ‘AA+(tha)’ National Long-term rating with a Stable Outlook to Ek-Chai Distribution System Company Limited’s (ECDS) up to THB5.0bn new debentures guaranteed by Tesco PLC (Tesco; Long-term Issuer Default Rating (IDR): ‘A-’/Stable).
The rating is based on the full and irrevocable guarantee provided by Tesco. However, the guarantor will not be liable to pay this guarantee in the following cases: if 10% or more, or THB5bn or more, of the issuer’s consolidated fixed assets and its subsidiaries are expropriated or nationalised by any government agency of Thailand; if any expropriation or nationalisation prevents the issuer and its subsidiaries from pursuing their ordinary course of business; if any government agency of Thailand intervenes, and prevents the issuer from transferring monies or converting foreign currency in order to pay the obligation under the debentures; or if any government agency of Thailand intervenes causing the transfer of any shares in the issuer that removes the guarantor’s status as the majority shareholder in the issuer or having control over it.
These risks are captured by the Sovereign’s Country Ceiling rating, which reflects transfer and convertibility risk, and sovereign intervention that materially impairs the creditworthiness of private sector entities (such as changes in regulated tariffs, deposit freezes, punitive taxation and expropriation). The expected rating of the debentures therefore takes into account the capping of the guarantor’s rating by Thailand’s ‘BBB+’ Country Ceiling, which is one notch lower than Thailand’s Long-term local currency IDR of ‘A-’.
Fitch notes that any rating actions that result in Tesco’s rating falling below Thailand’s Country Ceiling will affect the debentures’ expected rating. Investors should note that a one-notch change in a global scale rating could result in a change of more than one notch in a National Rating.
Tesco’s rating reflects its consistent operating performance. It has the highest operating margin among the main UK food retailers, and the largest market share in that sector. Tesco’s rating is constrained by negative free cash flow due to its high capital investment. This, combined with debt-funded acquisitions in South Korea and of Tesco Bank (formerly Tesco Personal Finance) in 2008 pushed the group’s retail-only lease-adjusted net leverage to 3.1x at financial year-end 28 February 2009 from 2.3x at FYE08. Retail-only lease-adjusted net leverage does not include debt, cash and EBITDAR of Tesco Bank.
ECDS was initially established by the Charoen Pokphand (CP) Group in 1993 to operate its first superstore, Lotus Supercenter. However, due to the financial crisis in 1997, CP Group sold its stake in ECDS to Tesco in 1998. The stores were, then, re-branded to ‘Tesco Lotus’. ECDS is a subsidiary of Tesco, via intermediate holdings. ECDS is the market leader among modern trade retailers in Thailand by sales and number of stores.
Applicable Criteria available on Fitch’s website at www.fitchratings.com: ‘Corporate Rating Methodology’ dated 24 November 2009.
Contacts: Somruedee Chaiworarat, Bangkok, +662 655 4762; Pimrumpai Panyarachun, Bangkok, +662 655 4752; Vincent Milton, Bangkok, +662 655 4755.