The debentures are rated at the same level as WHA's National Long-Term Rating, as they represent the company's direct, unconditional, unsecured and unsubordinated obligations. The proceeds of the debentures will be used to refinance some existing loans and fund working capital requirements.
KEY RATING DRIVERS
High Leverage: WHA's consolidated leverage rose significantly in 2015, as the acquisition of Hemaraj Land and Development Public Company Limited (Hemaraj) was mainly financed via debt of THB32bn. About 80% of this debt is due by mid-2017. Fitch expects WHA's FFO-adjusted leverage to be 5.0x-5.5x after repaying the debt. The loans will be repaid through asset disposals and cash savings from capex reduction.
Reliance on Asset Disposals: The Negative Outlook on the company's rating reflects uncertainty about the company's deleveraging plan. Most of the funds used to repay the debt will come from asset disposals, which are subject to market conditions. This could affect the valuation and timing of the disposals. Sales of Hemaraj's non-core assets and WHA's office buildings to a REIT were carried out as planned in 2015, with total proceeds of about THB5bn. In contrast, sales of Hemaraj's ready-built factories and warehouses to a REIT is behind the schedule, due to delays in setting up of the new REIT. The company expects the sale of Hemaraj's properties to be completed in September 2016. Debt reduction in 2015 was less than Fitch projected – albeit by less than THB2bn – as the lack of proceeds from the factory and warehouse sales were partially offset by proceeds from the exercise of warrants of THB3.2bn and lower-than-expected spending on project development.
More Integrated Business Model: The Hemaraj acquisition has strengthened WHA's market position in the industrial property business, supporting its leadership in the development of premium built-to-suit warehouses for lease and industrial estates in Thailand. Its operating scale, in terms of revenue (not including Hemaraj's sales of investment properties to a REIT), will likely increase to THB13bn-14bn in 2016-2017 from less than THB5bn in 2014. The proportion of recurring revenue to total revenue (not including share of net profit and loss from Hemaraj's affiliates in the power business) should rise to about 25% from 10% previously, mainly from Hemaraj's utility service business for its industrial estates.
Larger Exposure to Cyclicality: The expansion into industrial estate development has increased WHA's exposure to land sale volatility, cyclicality of property demand and higher competition. WHA's original business of developing premium built-to-suit warehouses for lease limited its exposure to property market cycles, as the warehouses are pre-leased and have long-term contracts. Competition in its niche market is also low.
Temporary Structural Subordination: WHA's senior unsecured debt could be structurally subordinated to the acquisition loans, which were taken by the subsidiary that directly holds the shares in Hemaraj. Dividends from Hemaraj, mainly from the sales of assets specifically earmarked for loan repayment, are likely to be used to repay the loans at this subsidiary. The structural subordination is temporary and likely to be limited, as most of the loans are due by mid-2017.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- About 20% increase in total revenue (not including Hemaraj's sales of investment properties to a REIT) in 2016
- EBITDA margin at 35%-38% in 2016
- A 40%-45% capex reduction on land acquisition and project development costs by WHA and Hemaraj in 2016 from the 2014 level.
RATING SENSITIVITIES
The rating on the debentures is sensitive to any changes in WHA's National Long-Term Rating.
Positive: Future developments that may, individually or collectively, lead to positive rating action and/or revision of the Outlook to Stable include:
- Consolidated FFO-adjusted leverage falling below 5.5x on a sustained basis, or
- More evidence on the progress of the asset disposal plan and debt repayment.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Consolidated FFO-adjusted leverage rising above 5.5x on a sustained basis.