Moody's downgrades True Corp and True Move to B3; ratings on review for further downgrade

“The rating action reflects the prolonged character of True Corp’s negative free cash flows [FCF], due to weak earnings from the mobile business and a high level of capital expenditures. As a result, we expect its financial and liquidity profiles to remain under pressure in the coming 12-18 months,” said Yoshio Takahashi, a Moody’s assistant vice president.

True Corp’s negative FCF rose to Bt21 billion for the 12-month period ended September 30, from about Bt6 billion in 2011 and below Moody’s expectation. 

The ratings company estimates that the negative FCF will likely remain at a similar level next year, given large capital requirements for 3G and the potential for additional spectrum fee payments following the 1.8GHz spectrum auction during the year.

At the same time, True Corp’s reported consolidated ebitda (earnings before interest, tax, depreciation and amortisation) margin is likely to stay weak. Its reported consolidated ebitda margin in the third quarter further declined to 17.6 per cent, from 19.8 per cent in the first quarter and 18.8 per cent in the April to June period.

While a reduction in revenue-sharing costs for expanding 3G revenue may help slightly improve the margins, Moody’s expects the reported consolidated ebitda margin will stay at around or below 20 per cent, due to rapid declines in earnings from 2G services, as well as intensified competition in 3G services.

Given the continued increase in debt, True Corp’s leverage – as measured by adjusted debt/ebitda – is likely to increase to about 6.5 times in the coming 12 months, from 6.1 times for the 12-month period ended September.

Such financial metrics are weak for the rating level. As a result, in the absence of any recapitalisation initiative, the company will likely require covenant waivers when covenant tests on its bank facilities commence next September.

Moody’s views that True Corp’s liquidity profile remains strained. In its estimation, internal cash sources from this quarter through to the third quarter of next year will measure about Bt40 billion, comprising cash holdings of Bt7.6 billion, undrawn committed bank facilities of Bt24.2 billion as of end-September, and expected operating cash flow of between Bt7 billion and Bt8 billion.

   The ratings agency estimates that this total is insufficient to cover its expected capital expenditure of about Bt25 billion to Bt30 billion and debt maturities of Bt19.4 billion during the same period, including around US$5 million (Bt160 million) outstanding under the $465-million bonds due on December 16, and $10.6 million under the $225-million bonds due next August. 

The company is seen as likely to continue to depend on borrowings from the domestic bank and bond markets to meet a financing gap.

Moody’s recognises that True Corp launched an infrastructure fund on Wednesday. It is planning to sell the ownership of its assets – such as towers and fibre-optic networks – to the fund and use the proceeds to reduce its debt and restore its equity base.

 

Uncertainty over fund  

However, the fund is still in the process of seeking approval from the Securities and Exchange Commission. Moody’s sees uncertainty over whether True Corp can establish it in a timely manner, how much it can generate in terms of cash proceeds, and how much debt it can reduce.

In addition, since True Corp plans to lease the assets from the infrastructure fund, Moody’s expects only a limited improvement in its adjusted leverage. 

In accordance with its standard financial adjustments, the ratings company will make operating-lease adjustments to estimate True Corp’s adjusted debt. 

True Corp will also be obligated to construct up to 6,000 towers to be injected into the fund over the next two years.

Moody’s review will focus on whether the company will be able to implement its recapitalisation plans, especially the planned infrastructure fund, in a timely manner. The review will also assess the effectiveness of the plans in helping the company mitigate its financial and liquidity pressures.

The outlook on the ratings could stabilise should True Corp hold a successful initial public offering for the fund and raise funds to reduce debt. 

However, any material delay in the approval process or launch of the IPO, or ongoing erosion in fundamentals, could result in further downgrade action.

Moody’s noted that the stand-alone financial profile of True Corp’s consolidated subsidiary True Move – which provides 2G mobile services – was weaker than that of True Corp itself.

However, it rates True Move in line with True Corp largely because True Move’s bank debt and bonds are guaranteed by those True Corp mobile subsidiaries that mainly offer 3G services. 

Given the strategic importance of the mobile business, Moody’s believes that True Corp will in turn support True Move.