TRIS Rating Assigns “BBB+/Negative” Rating to Senior Unsecured Debt Worth Up to Bt17,500 Million of “EDL-Gen”

TRIS Rating affirms the company rating of EDL-Generation Public Company (EDL-Gen) and the ratings of EDL-Gen’s existing senior unsecured debentures at “BBB+”. At the same time, TRIS Rating assigns the rating of “BBB+” to EDL-Gen’s proposed issue of up to Bt17,500 million in senior unsecured debentures. The proceeds from the new debentures will be used to refinance existing loans and for business expansion.

The ratings of EDL-Gen and its senior unsecured debentures reflect the credit profile of Electricite du Laos (EDL), the company’s major shareholder and the sole electricity off-taker. EDL is a state-owned enterprise of the Lao People’s Democratic Republic (Lao PDR). As a result, its credit profile is underpinned by the sovereign rating of “BBB+/Negative” assigned by TRIS Rating to the Lao PDR. EDL-Gen’s ratings take into consideration the company’s critical role in the electricity generation industry in the Lao PDR. The ratings are partially constrained by the sovereign rating of the Lao PDR, the sizable investments EDL plans to make, and the hydrology risks in the Lao PDR.

In the first three months of 2018, EDL-Gen’s revenue decreased by 9.1% (year-on-year) to Kip221.5 billion, mainly due to lower water inflow into the reservoir. The operating margin (operating income before depreciation and amortization as a percentage of sales) was 70.4% in the first three months of 2018.

At the end of March 2018, the company’s total debt was Kip10.16 trillion with a total debt to capitalization ratio of 52.4%. The new debentures will be used to refinance existing loan and to purchase 20% interest in Xayaburi hydroelectric power project and 20% interest in Donsahong hydroelectric power project from EDL. During the investment period, EDL-Gen’s debt will increase to a peak of about Kip17.8 trillion in 2022. However, EDL-Gen’s earnings before interest, taxes, depreciation and amortization (EBITDA) will also grow from Kip1.46 trillion in 2017 to approximately Kip2.7 trillion in 2022.

RATING OUTLOOK

The “negative” outlook reflects the outlook for the sovereign rating of the Lao PDR. TRIS Rating expects that the business model and the level of integration between EDL and EDL-Gen will remain unchanged. EDL-Gen is expected to expand as planned and generate strong cash flow. EDL is expected to hold a majority stake in EDL-Gen and receive continuing support from the government of the Lao PDR.

RATING SENSITIVITIES

A change in the outlook to “stable” is ultimately dependent on the outlook for the sovereign rating of the Lao PDR. A downside scenario for EDL-Gen’s ratings is primarily tied to a downgrade in the sovereign rating of the Lao PDR or aggressive investments that cause the company’s total debt to capitalization ratio to exceed 65% for a prolonged period.

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