Bangkok--6 Dec--Fitch Ratings
Fitch Ratings has affirmed Bangkok Aviation Fuel Services Public Company Limited's (BAFS) National Long-Term Rating at 'A(tha)' with a Stable Outlook. Fitch Ratings (Thailand) Limited has also assigned BAFS's proposed senior unsecured debentures of as much as THB1 billion due up to 2030 a National Long-Term Rating of 'A(tha)'.
BAFS's rating reflects its dominance in Thailand's aviation fuel-service market, its higher leverage and slower growth in volume.
The company's senior unsecured debt is rated at the same level as its National Long-Term Rating due to Fitch's expectation of average recovery for the debt. We expect BAFS's prior-ranking debt to EBITDA to drop to below 2.5x in 2022. However, any material rise in secured debt leading to an increase in subordination of the senior unsecured debt on a sustained basis may cause the rating of the senior unsecured debt to be notched down. BAFS plans to issue the debentures to fund its expansion plan and general working-capital requirements.
KEY RATING DRIVERS
Rising Financial Leverage: Fitch expects BAFS's funds from operations (FFO) adjusted net leverage to rise and remain between 3.5x and 4.5x in 2019-2020 (2018: 2.8x) as we forecast further cost over-runs in the northern pipeline project of Fuel Pipeline Transportation Limited (FPT), BAFS's subsidiary. The opening of the second phase is likely to be delayed by six months to mid-2020, postponing the project's revenue and cash flows, after the first phase started operations in June 2019. We expect BAFS's financial leverage to improve from 2021 to 2.5x-3.5x, below Fitch's negative rating sensitivity of 4x, after completion of the FPT project, assuming no other committed investment plans.
BAFS is bidding with a joint-venture partner to operate the aviation- fuelling system in the new U-Tapao Airport, which will be the main airport in the Eastern Economic Corridor. If it wins the contract, we estimate BAFS's financial leverage will be marginally higher and closer to 4.5x in 2019-2020 and about 3.5x in 2021. BAFS is also exploring investment opportunities outside Thailand, and we will treat any investments as an event risk.
Demand Risk for New Pipeline: FPT's new pipeline, the first in northern Thailand, carries offtake risk. The first phase serves part of the fuel transportation needs of most major oil companies in Thailand, but no offtake agreement has been signed yet. Fitch believes the offtake risk will be mitigated by the existing oil demand in the area served and the competitive cost of transport via pipelines compared with other modes, primarily trucks. The switch to pipelines is also likely to be supported by safety, social and environmental considerations.
Slower Volume Growth: Fitch expects BAFS's uplift volume, or the amount of fuel supplied to aircraft, to increase by 3.0%-3.5% a year over the medium term, slower than the 4.5% gain in 2018. The uplift volume growth in 2019 is likely to be about 2.5%, lower than the 4% we previously expected, because of the global economic slowdown and the appreciation of the Thai baht, which has deterred some tourists. These factors are likely to continue in 2020. Uplift volume growth should be supported mainly by additional long-haul flights by low-cost carriers at Don Muang Airport (DMK) while the uplift volume at Suvarnabhumi Airport (SA) is likely to be relatively flat in 2019-2020.
Strong Business Profile: BAFS is the sole operator of Thailand's fuel depot and hydrant network, and the major into-plane fuelling-service provider with an 88% market share at SA, the country's largest international airport. It is also the sole operator for refuelling services at DMK. The company faces limited competition and benefits from high barriers to entry as concessions from the airport operator are required to provide aviation-fuel services at airports. FPT's northern pipeline project should provide BAFS with business diversification and increase its operating scale over the next four to five years.
Limited Exposure to Oil Prices: BAFS is insulated from the volatility of fuel prices as its revenue is derived solely from fuelling-service fees, while fuel is sold by oil companies to airlines. BAFS's major cost is its pre-agreed concession fee, which means that profitability is stable.
DERIVATION SUMMARY
BAFS's operating cash flow profile is close to that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), the flagship power company of PTT Public Company Limited (AAA(tha)/Stable). GPSC's revenue is derived from contracted power and steam sales to customers with strong credit profiles. Both companies, therefore, have highly predictable and stable earnings. GPSC's higher financial leverage than BAFS is counteracted by its relatively stronger business profile with larger scale, which reflects its more diversified operations, especially after the acquisition of power producer GLOW Energy Public Company Limited, and the contractual nature of its revenue. BAFS is therefore rated at the same level as GPSC's Standalone Credit Profile of 'a(tha)'. GPSC's rating incorporates a one-notch uplift to reflect its moderate linkage with PTT.
CP ALL Public Company Limited (A(tha)/Stable), the largest convenience-store chain in Thailand, does not have earnings that are as highly predictable as that of BAFS. However, CP ALL has a very strong competitive position, with a market share that is significantly larger than that of its closest rival. Moreover, CP ALL sells daily essential goods, leading to stable revenue and margins. CP ALL has a significantly larger operating scale and EBITDA than BAFS. CP ALL is also deleveraging, which will result in a financial profile that we expect will be similar to BAFS's over the medium term, which explains their same rating level.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Uplift volume growth of about 2.5% in 2019 and 3.0%-3.5% a year in 2020-2021;
- The second phase of oil pipeline project in northern Thailand to be completed and start generating revenue in July 2020 with revenue of THB1.3 billion-1.4 billion in the first full-year of operations in 2021;
- A slight decrease in EBITDAR margin to about 56% in 2019-2020 due to the early stage of operating the new pipeline and an increase in the EBITDAR margin to 57%-58% in 2021, the first full year of operations of both phases of the new pipeline;
- Capex of about THB2.6 billion-2.7 billion in 2019, about THB2.1 billion-2.2 billion in 2020, and THB500 million-550 million in 2021, including investments in the oil-pipeline project and to step up operations as DMK expands.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A decrease in FFO adjusted net leverage to below 2.5x for a sustained period while maintaining a strong business profile and achieving stability in FPT's northern pipeline project
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- An increase in FFO adjusted net leverage to above 4.0x for a sustained period;
- Significant increase in the risks in FPT's northern pipeline project, resulting in further cost overruns; a delay in commencement of the operation; or significantly lower-than-expected cash flow from operations;
- Senior unsecured rating could be notched down from the company's National Long-Term Rating if there is a material rise in secured debt, leading to a significant increase in subordination of senior unsecured debt on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt-maturity profile. At end-September 2019, BAFS had unsecured short-term interest-bearing debt of THB468 million due over the next 12 months while its readily available cash balance and Fitch's defined liquid investments were THB1.4 billion, excluding THB613 million in bank deposits and government bonds, which are cash collateral for a secured long-term loan. BAFS's liquidity is also supported by an undrawn committed facility of THB1.3 billion and strong cash-flow generation.
Increasing Secured Debt: BAFS's secured debt is rising as FPT's pipeline project is funded by project-finance loans. The prior-ranking debt to EBITDA is likely to increase to 2.5x-3.5x over the medium term, which is above the 2.0x-2.5x the general threshold beyond which Fitch may notch unsecured debt for material subordination (9M19: 2.5x). However, more than 98% of secured debt is at FPT, which should contribute less than 25% of total EBITDA over the next two to three years. We expect BAFS's prior-ranking debt to EBITDA to drop to below 2.5x in 2022.