GPSC Outlook Revised To Negative On The Proposed Acquisition Of #BBB-# Rating Affirmed

Stocks and Financial Services Press Releases Friday June 22, 2018 15:04
SINGAPORE--22 Jun--S&P Global Ratings

SINGAPORE (S&P Global Ratings) June 22, 2018--S&P Global Ratings revised the outlook on Global Power Synergy Public Co. Ltd. (GPSC) to negative from stable. At the same time, we affirmed our 'BBB-' long-term issuer credit rating on the Thailand-based power generator.

We revised the outlook because we expect the proposed acquisition of Glow Energy Public Co. Ltd. to substantially increase GPSC's leverage, creating some uncertainty around the combined entity's long-term tolerance for debt.

GPSC plans to acquire 69.1% of Glow from France-based diversified utility group ENGIE SA at Thai baht (THB) 96.5 per share and launch a tender offer for the remaining 30.9% equity. If GPSC secures full ownership of Glow, its net debt will increase by about THB170 billion, including the consolidation of about THB30 billion of net debt outstanding at Glow. GPSC will also consolidate Glow's EBITDA of about THB17 billion.

GPSC intends to raise a THB143 billion bridge loan to fund the transaction, with a view to refinance with a mix of long-term debt and a maximum of THB74 billion in equity in the following months.

In our view, the Glow acquisition marks a structural shift in GPSC's debt tolerance. Based on GPSC's indicated funding mix, we estimate that the company's debt-to-EBITDA ratio will increase to close to 5x in 2019. We are therefore lowering GPSC's stand-alone credit profile (SACP) to 'bb-' from 'bb'.

Both the transaction's definite cost and funding mix are unknown. GPSC's debt-to-EBITDA ratio could exceed 5x if the proportion of debt in the funding mix is higher than the company has indicated. A more aggressive use of leverage would also limit the potential for debt reduction, building downward rating pressure.

In our view, the refinancing risk of the short-term bridge loan that GPSC intends to use to fund the transaction is manageable. The company's parent PTT Public Co. Ltd. has a track record of supporting the liquidity of its operating companies through equity injections or short-term financing. This tempers the risk of a sudden deterioration in GPSC's liquidity due to the Glow acquisition.

We consider the combined group's earnings quality as moderately stronger than GPSC's on a stand-alone basis, notwithstanding the step change in size following the acquisition. Glow's operational strengths, including asset quality, the terms of the power purchase agreements with the Electricity Generating Authority of Thailand, and the likely conditions for the upcoming contract renewals will be important factors for GPSC's credit standing.

We affirmed the rating on GPSC because we expect the transaction to only moderately increase PTT's leverage, and not alter the group ties between the two.

The negative outlook over the next 12-18 months reflects the substantial increase in GPSC's debt following the proposed acquisition, and the uncertainty over the company's long-term tolerance for financial leverage.

We would lower the rating if we revise GPSC's SACP downwards. That could happen if the company's capital structure weakens more than we anticipate and the company fails to reduce its debt-to-EBITDA ratio well below 5.0x within the next 12-18 months. Leverage would remain elevated if GPSC does not raise enough equity after the Glow acquisition, or poorly executes its growth ambitions, with cost overruns in new projects and aggressive spending relative to its cash generation capability. In a less likely scenario, high distributions to shareholders would add to the rating pressure.

The SACP could also deteriorate if GPSC's earnings erode because of material operating challenges in key units, poor integration of Glow, an adverse change in regulation, or a loss of competitive advantage in the industrials segment.

We could also lower the rating if: (1) we believe GPSC's strategic relevance to PTT has declined, for instance if its status as the group's preferred power supplier seems less entrenched or if PTT and subsidiaries' ownership reduces significantly; or (2) we lower the SACP of PTT, which we view as an unlikely scenario.

We would revise the outlook to stable if we believe that GPSC is committed to restoring its debt-to-EBITDA ratio to well below 5.0x. The revision to stable would be contingent on the company maintaining adequate liquidity and having substantially reduced its refinancing requirements.

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