TRIS Rating Assigns New Issue Rating and Affirms Company and Current Issue Ratings of “CK” at “BBB+” with “Negative” Outlook

TRIS Rating Co., Ltd. has assigned the rating of “BBB+” to the proposed issue of up to Bt3,000 million in senior debentures of CH. Karnchang PLC (CK). At the same time, TRIS Rating has affirmed the company and current issue ratings of CK at “BBB+”. The outlook is “negative”. The proceeds from the new debentures are for debt refinancing and future business expansion. The ratings reflect the company’s leading position in Thailand’s engineering and construction (E&C) industry, proven records in undertaking government infrastructure and specialized projects, and recurring income from concession investments. The ratings are partially offset by high financial leverage due to concession investments, backlog concentration, the inherent risk of fixed-price contracts, and pressure on cash flow generation as a result of competitive market environment and political instability.

The “negative” outlook reflects a highly levered capital structure and challenges facing CK in generating cash flows to service debt obligation and financial commitments in concession projects. The ratings could be downgraded if the company fails to strengthen its cash flow profile and de-lever balance sheet within the next 12-18 months. On the other hand, the outlook could be revised back to “stable” should the company succeed in building up backlog with respectable margins that prove to enhance cash flows over the medium term, as well as demonstrate an ability to bring down its financial leverage in order to have a moderate cushion for its covenant ratio.

TRIS Rating reported that CK is one of the top three construction companies in Thailand. The company’s construction experience encompasses a broad array of construction activities, ranging from general civil work to highly sophisticated projects. These diverse experiences, together with a strong relationship with leading foreign contractors, help enhance the company’s business profile. As of October 2009, the company’s outstanding backlog was approximately Bt16,218 million, of which 62% was the Purple-Line electric train project. The backlog has been under pressure in recent years due to an intensely competitive market on the back of scarcity of large-scale public projects. The backlog is expected to improve in the near future if the government could roll out large-scale infrastructure projects under the stimulus package as planned.

CK’s concessions cover several infrastructure assets, including expressways, underground mass transit, tap water, and electricity. As of June 2009, the investments included a 16.4% stake in Bangkok Expressway PLC (BECL), a 24.6% share in Bangkok Metro PLC (BMCL), a 35.3% holding in Thai Tap Water Supply PLC (TTW), and a 38.0% holding in South East Asia Energy Co., Ltd. (SEAN). To some extent, recurring dividend income from BECL and TTW help CK reduce exposure to the volatile and cyclical construction revenue. The Nam Ngum II project undertaken by SEAN is approximately 90% complete. The project is expected to generate income by 2011. BMCL’s unprofitable results continue to weigh on CK’s credit profile.

TRIS Rating said, CK’s cash flow generation continues to be under pressure as revenue from the Nam Ngum II project will mostly be realized in 2009. However, current projects on hand, expected backlog improvement, and dividend income should generate a reasonable cash flow contribution in coming years. CK’s leverage level is high. As of June 2009, the debt to capitalization ratio stood at 77.9%. Concession investments are mostly funded by debt, resulting in a continuing elevation of leverage level. TRIS Rating cautions on CK’s financial commitments in terms of shareholder supports to BMCL and concession investments, which should constrain the company’s efforts to bring down its debt level over the medium term. The company’s balance sheet capacity is limited by financial covenant of keeping net debt to equity ratio below 2.5 times. As of June 2009, the ratio stood at 2.43 times. However, the company’s liquidity is enhanced by an investment portfolio of sound marketable securities. As of June 2009, the market value of CK’s holding in TTW was Bt5,804 million, compared with the book value reported in the balance sheet at Bt2,480 million. CK also plans to list SEAN on the stock market in the near future. TRIS Rating expects the company to continue exploring alternatives and executing necessary fund raising measures to support its debt reduction efforts and future investments. -- End

Company Rating: Affirmed at BBB+ Issue Ratings: CK09OA: Bt120 million senior debentures due 2009 Affirmed at BBB+ CK09OB: Bt880 million senior debentures due 2009 Affirmed at BBB+ CK102A: Bt1,100 million senior debentures due 2010 Affirmed at BBB+ CK107A: Bt2,000 million senior debentures due 2010 Affirmed at BBB+ CK114A: Bt2,000 million senior debentures due 2011 Affirmed at BBB+ CK122A: Bt1,616.2 million senior debentures due 2012 Affirmed at BBB+ CK126A: Bt1,400 million senior debentures due 2012 Affirmed at BBB+ CK142A: Bt883.8 million senior debentures due 2014 Affirmed at BBB+ Up to Bt3,000 million senior debentures due within 2013 BBB+ Rating Outlook: Negative Copyright 2009, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information.

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