Moody's, Tris impose downgrades on ThaiBev after F&N acquisition

On Tuesday, the same day as Moody’s move, Tris Rating removed the CreditAlert with “negative” implication placed on the company rating of ThaiBev since last July 20 year and downgraded the company rating to “AA-” from “AA”, with stable outlook.
In a statement, Moody’s said its downgrade reflected the view of a more aggressive risk appetite evidenced by ThaiBev’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 the Singapore firm.
Moody’s put the rating under review in July 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 an adjusted rate of debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) of about 4.1 times in 2012. This was 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 dollars (Bt83.3 billion) to accumulate its 28.61-per-cent minority stake in F&N. TCC Assets (TCCA), a privately held company owned by the major shareholders 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 this July as per the terms and conditions published by the company in May. Accordingly, about 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 this year.
“Additionally, lack of transparency regarding TCC’s financial position and strategic intentions also weigh on ThaiBev’s ratings,” Di Chiara said.
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 this year. 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 says it would consider upgrading the rating over the long term if the company sustains strong operating performance while successfully collaborating with F&N, if it 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 range of around 2.0-2.5.
Meanwhile, Tris Rating said its action reflected ThaiBev’s weakened financial position, now that it has acquired a 28.6-per-cent stake in F&N, funded by debt. ThaiBev plans to make a lump-sum prepayment by utilising cash received from F&N’s capital reduction. The prepayment will reduce refinancing risk of the outstanding acquisition-related loans.
Tris expects ThaiBev to maintain a moderate level of leverage, since it intends to continue its high dividend pay-out. The “stable” outlook is based on the expectation that ThaiBev will make no other large investment during the medium term and it can maintain its ability to generate cash flow and its strong positions in the Thai alcoholic-beverage market.
ThaiBev’s financial strength is characterised by strong sales growth, increases in cash flow, and adequate liquidity, the agency said. However, its huge debt-financed investment has significantly weakened its balance sheet. The softened financial position is not expected to rebound within the near term, considering the planned capital expenditures, high dividend pay-out, and committed schedule payment.
ThaiBev’s funds from operations (FFO) have climbed from Bt15 billion in 2010 to about Bt19 billion in 2012, and Bt5.4 billion for the first three months of 2013. Tris Rating estimates ThaiBev’s FFO to grow beyond Bt20 billion per annum in the medium term.
ThaiBev’s strong ability to generate cash flow has enhanced the company’s financial strength and it will serve as a cushion for its investment activities. Although acceptable, ThaiBev’s cash-flow protection declined after the investment in F&N, as evidenced by a lower FFO to total debt ratio.