Fitch Downgrades CP ALL to 'A(tha)'; Rates its Hybrid Debentures 'BBB(tha)'
Fitch has also assigned CP ALL's new subordinated perpetual debentures a National Long-Term Rating of 'BBB(tha)'. The issuance is up to THB10bn, payable upon dissolution with the issuer's right to early redemption and unconditional interest deferral. The debentures qualify for 50% equity credit under Fitch's "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" criteria. Features supporting the equity categorisation include junior subordination priority, a deemed effective maturity in excess of five years, and deferrable interest coupon payments. The debentures are perpetual, while Fitch assesses the effective maturity to be at the 50th anniversary from issuance, due to the debentures' coupon step-up from year 51 of over 100bp. Therefore, the 50% equity credit will change to 0% five years before the effective maturity date.
KEY RATING DRIVERS FOR THE DEBENTURES
Rating Reflects Deep Subordination: The debentures have been notched down by three notches from CP ALL's National Long-Term Rating, given their deep subordination and to reflect that loss-absorption is higher than usual. A wider-than-two-notch standard notching is due to a significant amount of secured debt, which made up 4.3x of the company's EBITDA in the 12 months to June 2016, which also results in senior unsecured debt rated one notch below the company's rating.
KEY RATING DRIVERS FOR CP ALL
Slower-than-Expected Deleveraging: The downgrade reflects CP ALL's high financial leverage which is unlikely to fall to the level commensurate with an 'A+(tha)' rating over the next two years. Fitch Ratings expects CP ALL's FFO-adjusted net leverage to remain above 3.5x beyond 2018. The deleveraging of CP ALL has been slower than previously expected because of a weak domestic economy over the past two years. Sales of shares in subsidiary Siam Makro Public Company Limited (Makro) are also unlikely to be carried out over the next 12-18 months.
Moderate-but-Defensive Growth: Fitch expects CP ALL's sales to increase by 9%-11% per year in 2016-2018, driven mainly by new store openings and a recovery in same-store sales growth to 3.0%-4.0% a year for both 7-Eleven and Makro stores (2Q16: 5% and 6%, respectively), in line with the domestic economic recovery. The company also continues to benefit from the "defensive" nature of its business, which sells daily essentials with low revenue and margin volatility; its medium-term growth potential is still supported by Thailand's immature market for modern-food retailing.
Leading Market Position: We believe CP ALL is likely to maintain its leading position despite intense competition. The company has more than 9,000 stores nationwide, and a more-than-60% share of the convenience-stores market in Thailand, far more than its closest rival. Its dominance is supported by its large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
Fitch's key assumptions within our rating case for the issuer include:
- revenue growth of 9%-11% per year in 2016-2018;
- EBITDAR margin to narrow slightly to 10% in 2016, and improve to 10.2%-10.4% in 2017-2018;
- 700 new 7-Eleven stores per year in 2016-2018 and 13 new large-format Makro stores in 2016, with a slowdown to four stores per year for Makro in 2017-2018.
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- FFO-adjusted net leverage at less than 3.5x.
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- A failure to reduce FFO-adjusted net leverage to below 4.5x by 2018 (end-June 2016: 5.9x);
- Deterioration in EBITDAR margin to below 7.5% on a sustained basis (1H16: 10.0%)