ThaiBev's rating downgraded on higher debt level

The rating outlook is stable.

In a statement, Moody's said the downgrade reflects the view of a more aggressive risk appetite evidenced by the company's debt-funded acquisition of a 28.61 per cent stake in F&N and execution risks associated with international expansion through its collaboration with F&N. 

Moody's put the rating under review in July 2012, after ThaiBev announced the plan to acquire a minority stake in F&N, a pan-Asian consumer group engaged in food and beverages, properties, and publishing and printing.

"The acquisition increased ThaiBev's debt level substantially resulting in adjusted debt/EBITDA approximately 4.1 times in 2012, a significant shift in the company's financial risk appetite from historical practice where leverage was maintained below 1 time," said Annalisa Di Chiara, a Moody's Vice President and Senior Analyst.

The company ultimately spent in excess of $3.5 billion Singapore dollar (US$2.6 billion) to accumulate its 28.61 per cent minority stake in F&N. TCC Assets (TCCA), a 

privately held company owned by the major shareholder of ThaiBev (Charoen Sirivadhanabhakdi and Khunying Wanna Sirivadhanabhakdi ) accumulated a 61.67 per cent stake in F&N over the same period. Together, TCCA and InterBev Investment Ltd (IBIL), an indirectly wholly-owned subsidiary of ThaiBev have a 90.28 per cent stake in F&N.

"ThaiBev's minority stake in F&N will provide it with an opportunity to sell its brands internationally and increase its non-alcoholic drink sales through F&N's distribution network in Singapore, Malaysia, Brunei and Myanmar. However, we do not believe a material expansion of revenues or EBITDA is likely over the next 12-18 months, as it will take some time for ThaiBev's products to penetrate new markets and any potential cost synergies to materialise. At the same time, ThaiBev's core businesses are also under increased pressure amid competition and higher excise taxes in Thailand," added Di Chiara, also Moody's lead analyst for ThaiBev.

The rating action assumes that the proposed S$4.7 billion capital reduction announced by F&N will occur by July 2013 as per the terms and conditions published by the company in May. Accordingly, approximately, S$1.35 billion will flow to ThaiBev as a result of this transaction which will be used to repay debt. 

Moody's expects that leverage will remain at around 3 times in 2013.

"Additionally, lack of transparency regarding TCC's financial position and strategic intentions also weigh on ThaiBev's ratings, " said Di Chiara.

On the other hand, the rating continues to reflect ThaiBev's strong and stable cash flows generated from its leading domestic market position in spirits.

The outlook is stable, reflecting the expectation that proceeds from F&N's proposed capital reduction will be used to repay debt such that adjusted debt/EBITDA reduces to 3 times in 2013.  It also reflects Moody's expectation that ThaiBev will not undertake any material additional debt-funded acquisitions over at least the next 12-18 months.

An upgrade over the near term is unlikely. However, Moody's would consider upgrading the rating over the long term if the company sustains strong operating performance while successfully collaborating with F&N,  shows continued improvement in profitability and leverage, and if management demonstrates a commitment restore its financial profile. This 

would include a reduction in leverage levels such that adjusted debt to EBITDA is sustained in the around 2.0-2.5 range.