Moody's downgrades True outlook

The rating agency suggested urgent recapitalisation to bring down the debt level. In the absence of timely recapitalisation, True Corp’s leverage metrics will remain above Moody’s tolerance levels, leading to imminent downward pressure on the rating. Charoen Pokphand Group is the majority shareholder of True Corp, holding 63.3 per cent as of March 15.

 “The change in outlook refects True Corp’s deteriorating financial profile resulting from the need to invest in its 3G networks and services, and competitive headwinds in the Thai cellular industry as all three cellular operators launch 3G services under the new 2.1GHz licences this year,” said Nidhi Dhruv, Moody’s lead analyst for True Corp and True Move.

True Corp’s adjusted debt/EBITDA (earnings before interest, tax, depreciation and amortisation) increased to 6.1 times for last year. Although it improved slightly to 5.7 times this past March, it remains high for the rating level. 

At the same time, EBITDA margins have deteriorated to 19.7 per cent from 27 per cent in 2011 as a result of high selling expenses and customer acquisition costs.

Over the next 12-18 months, there will be increased competition from the two other Thai operators – Advanced Info Service and Total Access Communication – both of which have stronger financial profiles, forcing True Corp to front-load its capital expenditure in order to strengthen its 3G coverage and gain market share, while maintaining advertising and customer acquisition costs at current high levels, Moody’s said.

True Corp also has a strained liquidity profile over the next 12-18 months, and the company will require waivers when covenant tests on its bank facilities commence in September next year. 

Moody’s said recapitalisation was critical to de-lever True Corp, given its weak balance sheet and the ongoing need to invest in the business. Without recapitalisation, it expects the company’s adjusted leverage to remain higher than the tolerance of 5.5-6 times for the current B2 rating over the next two to three years.

“In the absence of successful recapitalisation, the need for accelerated capex coupled with initial lower utilisation rates on 3G and data services will lead to leverage metrics exceeding our tolerance levels for the B2 rating,” added Dhruv.

True Corp’s management is pursuing several options to de-lever its balance sheet, which include assets sale and leaseback via an infrastructure fund, sale of non-core assets, an equity rights offering and bringing in a strategic partner. 

However, all of these have attached uncertainties, the rating agency said.

The negative outlook also takes into account an expected increase in competition following the roll-out of 3G services by all three operators under the 2.1GHz licence and the ongoing regulatory uncertainties around True Move’s 1800MHz concessions expiring this coming September. 

 The outlook could revert to stable if the debt level is cut, if the company can deliver on its competitive strategy for 3G services roll-out, and if there is clarity on the extension of True Move’s 1800MHz concession, said the rating agency.