S&P lowers ThaiBev corporate rating, with 'stable' outlook

At the same time, it affirmed “axBBB+” long-term and “axA-2” short-term Asean regional-scale ratings on the beverage maker. 

S&P removed all the ratings from CreditWatch, where it had placed them with negative implications on November 27. It withdrew all the ratings at the company’s request.

“We lowered the rating on ThaiBev because we now view the company as a ‘core’ member of a corporate group that we assess as having weaker credit characteristics than those of ThaiBev as a standalone entity, following the implementation of our revised group ratings methodology criteria,” said S&P credit analyst Xavier Jean.

“We define ThaiBev’s corporate group as consisting of ThaiBev, Singapore-based conglomerate Fraser & Neave [F&N] and investment holding company TCC Assets [TCCA]. Based on our criteria, we view ThaiBev as a ‘core’ but ‘partially insulated’ member of the group, and cap the company’s stand-alone credit profile of ‘BBB-’ at one notch above our assessment of the group credit profile of ‘BB’,”, he said.

S&P views the corporate group to which ThaiBev belongs as being highly leveraged. The rating agency evaluates the group’s consolidated cash-flow adequacy as substantially weaker and its consolidated debt as considerably higher than that of either ThaiBev or F&N on a standalone basis.

“We estimate the consolidated ratio of total debt to EBITDA [earnings before interest, tax, depreciation and amortisation] to be 6.0x-6.5x and the consolidated EBITDA interest coverage to be about 4.0x-4.5x, following a planned capital reduction at F&N. 

“We also estimate that about 50 per cent of the consolidated debt is held at TCCA, an investment holding with no cash-generative operations besides the common dividends it will receive from F&N. The debt is the result of what we believe was a largely debt-funded purchase of about a 61-per-cent stake in F&N between 2012 and 2013,” Jean said.

Its assessment of ThaiBev as a core member of the corporate group reflects its view that the group is highly unlikely to sell the company, given its high contribution to the group’s revenues, EBITDA and cash flows. 

“ThaiBev operates in the beverage segment, which we believe is integral to the overall group’s strategy. The company also has a long record of successful operations in its core markets and its majority ownership has remained unchanged for more than a decade.

“We assess ThaiBev to be a ‘partially insulated’ member of its corporate group. We no longer view ThaiBev’s financial performance and funding prospects as being entirely dissociated from those of the other group members, in particular TCCA,” Jean said. 

“The large debt-funded acquisition of F&N by the common majority shareholder of TCCA and ThaiBev suggests a significant shift in financial policy and a heightened risk tolerance that affected the entire group structure, with both entities simultaneously leveraging their balance sheet significantly. 

“We believe that TCCA’s likely high debt burden and the subordinated nature of its debt has the potential to lead to more aggressive financial policies at ThaiBev and influence ThaiBev’s financial performance, debt-servicing capacity, and financial policies to an extent. 

“That said, we acknowledge that the company can operate as a separate entity, keep its funds separate from other group companies, is severable from the group, and pay its liabilities out of its own funds,” said the credit analyst. 

ThaiBev’s standalone credit profile is based on a “satisfactory” business risk profile and an “intermediate” financial risk profile, as defined in S&P’s criteria. 

 

Focus on Thai operations 

“Our business risk profile assessment incorporates our ‘low’ industry risk assessment for the branded non-durable consumer products sector and a ‘moderate’ country risk based on the company’s focus on operations in Thailand. 

“We expect ThaiBev to maintain its domestic market share in the stable and highly profitable spirits market because of strong brand recognition and well-established distribution networks. 

“The company’s proven ability to pass-through increases in excise taxes to its customers also supports its business risk profile because it makes margins more predictable,” Jean said. 

“Our assessment of ThaiBev’s financial risk profile is based on our expectation that the company will generate positive discretionary cash flows over the next three years and slowly reduce its debt burden. This is despite likely softness in operating performance over the next six to 12 months, given higher excise taxes on spirits and beer and a weaker-than-anticipated performance at the company’s non-alcoholic beverage operations.

“The stable outlook reflects our view that the group credit profile will continue to constrain ThaiBev’s stand-alone credit profile, unless debt at the group level declines materially.” 

Jean added that the rating agency could raise the rating on ThaiBev if it thinks that the group credit profile has improved. This could happen if the group reduces its debt, such that its ratio of consolidated debt to EBITDA falls below 4.5x on a sustained basis.

“We could lower the rating if we believe that the group credit profile has deteriorated. This could materialise if the performance of ThaiBev or F&N, which are the major contributors to the group’s cash flows, weakens materially. 

“A consolidated ratio of debt to EBITDA of more than 6.5x on a sustained basis would indicate such deterioration. We could also lower the rating if we observed that ThaiBev and other group members are operating more like a single economic entity,” he said.