OREANDA-NEWS. Fitch Ratings (Thailand) Limited has affirmed the 'A(tha)' National Long-Term Ratings on Thailand-based BTS Group Holdings Public Company Limited (BTS Group) and its subsidiary, Bangkok Mass Transit System Public Company Limited (BTSC). The Outlooks are Stable.

However, Fitch expects the rating headroom for BTS Group and BTSC to reduce significantly after BTSC entered into an agreement with Krunthep Thanakom Company Limited (KT) to supply and install an electrical and mechanical system (E&M) for extensions to Bangkok's urban rail lines. The contract will be for the South Extension (Bearing-Samutprakarn) and the North Extension (Mo Chit-Sapan Mai-Khu Kot), and has total project value of about THB19bn.


Financial Flexibility Reduced: BTS Group's FFO-adjusted net leverage will increase to significantly over 3.5x, the level at which we may consider negative rating action, over FY17-FY20 (financial year ending 31 March), from 1.7x at end-June 2016. This is because BTSC will incur the costs of the project in FY17-FY21, but KT will only repay the costs in a lump sum in four years, at the earliest.

We expect BTS Group's financial leverage to drop to below 3.5x from FY21 onwards as the company's earnings increase from train procurement and operation and maintenance (O&M) service, even if KT exercises the option to pay for the E&M project in six years, instead of four. However, BTSC will have far less financial flexibility over the next two to three years as it incurs additional interest costs on debt to fund the E&M contract. We expect the FFO net cash interest coverage to weaken to about 3.0x-3.5x for BTS Group and about 2.0-2.5x for BTSC in FY18-FY19.

Adequate Liquidity: In affirming the ratings, we have also considered BTS Group's liquidity, which should still be sound, given strong dividend from its 33% investment in BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF), and its large cash balance and treasury investments. Dividends from BTSC are likely to fall significantly for some time.

Project Risks Contained: Fitch considers the project risks for the E&M contract to be low. The contract contains a pass-through of performance risks to the consortium contractors, including Bombardier Transportation Signal (Thailand) Limited (Bombardier), which has a proven track record as the E&M contractor of the existing Green Lines. Cost overruns will also be passed on to the contractors. BTSC will also receive accrued interest on its investment, at a pre-agreed rate, as part of the lump sum payment from KT. KT is a wholly owned enterprise of Bangkok Metropolitan Administrator (BMA), the entity that governs Bangkok. KT operates the sky trains' Green Line extensions (Saphan Taksin-Bang Wa stations and On Nut - Bearing stations) and Bangkok Bus Rapid Transit (BRT) system.

Steady Cash Generation: BTS Group's mass-transit (excluding new mass-transit lines) and media businesses generate strong cash flow and have low capex requirements. These are the two main businesses that generate cash to support group capex, including investments in new mass-transit lines, property and service businesses in the medium term.

Leading Mass Transit Operator: BTS Group has a strong business position in Bangkok's mass-transit sector. The company operates the BTS Skytrain network, which covers key commercial and strategic locations in Bangkok, handling around 70% of passenger volume in the capital's rail mass-transit system in 2015.

Solid Media Operations: Fitch believes BTS Group's media operations related to advertising space on the Skytrain network and elsewhere will continue to generate strong earnings and cash flows in the medium term. The Skytrain-related media operations are generally stable, which should help mitigate the weak near-term outlook for Thailand's broader media industry.

Property Exposure Increases Risks: The aforementioned credit strengths are partly offset by the group's relatively higher-risk property business; its significant investments in property projects over the next few years have added to BTS Group's financial indebtedness. However, Fitch believes the company's strategy of focusing on condominium projects in prime locations that are close to mass-transit stations, and involving experienced joint-venture (JV) partners would help reduce the execution risks for these projects.

Large Investment; Negative FCF: BTS Group has planned some THB12bn of investments in the next three years, around 20% of which are for its property and service businesses. In addition, another THB18bn-19bn of outflow is likely for acquisitions, investment in associates and JVs, and investment in E&M project during this period. These will lead to large negative FCF over the next three years.

Limited Rating Headroom: We expect BTSC to finance the costs associated with the E&M project using long-term, non-amortising debt to match its cash flows. However, additional interest costs incurred on such additional debt will significantly reduce its debt service coverage from cash flows. As such, any material increase in investments, weaker-than-expected cash generation in the medium term, or a debt structure that adds high debt servicing costs could lead to a negative rating action.

BTS Group-BTSC Ratings Equalised: We rate BTS Group and BTSC on a consolidated basis, given the strong operating and strategic linkages between the parent and subsidiary as per Fitch's Parent and Subsidiary Linkage criteria.


Fitch's key assumptions within our rating case for BTS Group include:

- EBITDAR margin of around 30%-33% over the next three years

- The mass transit business to be granted O&M contracts for three new mass transit lines

- About THB12bn of capex over FY17-FY19, in addition to the loan or equity injection to associates and JV property projects, and E&M investment costs

- Full payment for E&M project to be received in FY21

- High dividend payment for FY17


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

Fitch does not expect positive rating action over the medium term given the increase in debt and reduced financial flexibility from the E&M project.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- FFO net cash interest coverage at below 3.0x for BTS Group or below 2.5x for BTSC;

- Larger-than-expected capex and investment, weaker earnings, or delayed payment for the E&M project leading to a slower-than-expected deleveraging and FFO-adjusted net leverage of BTS Group remaining above 3.5x in FY21;

- A significant increase in business risks