The downgrade and the Negative Outlook reflect Fitch's expectation that BAFS's financial leverage is likely to surge beyond a level that is consistent with its rating over the next two years in light of the effect of the coronavirus pandemic on the global aviation industry. Deleveraging depends on a recovery in the global aviation industry, which is uncertain and not likely to be rapid in 2021.
KEY RATING DRIVERS
Slow Recovery from Pandemic: Fitch estimates that BAFS' uplift volume - the amount of fuel supplied to aircraft - will drop by 52%-53% in 2020, following an almost complete suspension of flights for one to two months by major airlines, especially those based in Bangkok, on account of the coronavirus pandemic. We do not believe the pace of recovery will be rapid, and expect a lasting impact on the global aviation industry. BAFS's uplift volume should recover to about 70% of pre-pandemic levels in 2021 and to 90% by 2022. This is likely to weaken BAFS's financial profile significantly.
Rising Financial Leverage: Fitch expects fund flow from operations (FFO) net leverage to soar to above 13x in 2020 (2019: 3x), due to the pandemic. It should then improve to below 7x in 2021, with gradual recovery of volume, and to below 5x in 2022; a level commensurate with the current rating.
Large Capex: The higher leverage is partly driven by large capex of about THB2.7 billion in 2020-2021 for the ongoing north pipeline project of BAFS' subsidiary, Fuel Pipeline Transportation Limited (FPT). We expect the project to be completed by year end, a delay from our previous mid-year expectation.
Possible Investments: BAFS is bidding with a joint-venture partner to operate the aviation fuelling system in the new U-Tapao Airport, which will be the main airport in the Eastern Economic Corridor. We expect financial leverage will further increase if BAFS wins the contract. The company is also exploring investment opportunities outside of Thailand, which we would treat as an event risk.
Demand Risk for New Pipeline: FPT's new pipeline, the first in northern Thailand, carries off-take risk. The first phase serves part of the fuel transportation needs of most major oil companies in Thailand, but no off-take agreement has been signed. Fitch considers off-take risk to be mitigated by the oil demand in the area served and the cost of transport via pipelines being competitive compared with other modes, such as trucks. The switch to pipelines is also likely to improve safety, social and environmental outcomes.
Sound Business Profile: BAFS is the sole operator of the fuel depot and hydrant network, and the major into-plane fuelling service provider, with an 89% market share at Suvarnabhumi Airport, Thailand's largest international airport. It is also the sole operator for refuelling services at Don Muang Airport, another major international airport serving low-cost carriers. The company faces limited competition and benefits from high barriers to entry, as concessions from the airport operator are required to provide aviation fuel services at airports. In addition, FPT's north pipeline project should provide BAFS with business diversification and increase its operating scale over the next four to five years.
Limited Exposure to Oil Prices: BAFS is insulated from fuel-price volatility, as its revenue is derived solely from fuelling service fees, with fuel being sold by oil companies to airlines. BAFS's major cost is its pre-agreed concession fee, resulting in stable profitability.
DERIVATION SUMMARY
BAFS's operating cash flow profile is close to that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable), the flagship power company of PTT Public Company Limited (BBB+/Stable) group. GPSC's revenue is derived from contracted power and steam sales to customers with strong credit profiles. Both companies, therefore, have highly predictable and stable earnings, though GPSC's operations are likely to be less affected by the pandemic. GPSC's higher financial leverage than BAFS is counteracted by its stronger business profile and larger scale, which reflects the contractual nature of its revenue and more diversified operation, especially after the acquisition of power producer, GLOW Energy Public Company Limited. Nonetheless, BAFS's financial leverage over the next two years is likely to surge due to the effect of the pandemic on the global aviation industry, which could drag out post 2021. We therefore rate BAFS below GPSC's Standalone Credit Profile of 'a(tha)'. GPSC's rating incorporates a one-notch uplift to reflect its moderate linkage with PTT.
CP ALL Public Company Limited (A(tha)/Stable), Thailand's largest convenience-store chain, has less predictable earnings than BAFS, but it has a strong competitive position, with market share that is significantly larger than that of its closest rival. Moreover, CP ALL sells daily essential goods, leading to stable revenue and margins. CP ALL also has a larger operating scale and EBITDA than BAFS. Both companies have similar financial leverage, but CP ALL is in the process of acquiring Tesco Lotus, the largest hypermarket operator in Thailand. The deal, if completed, is likely to increase CP ALL's financial leverage over the medium term, but this will be somewhat compensated by its stronger market position and larger operating scale. On the other hand, BAFS' financial leverage is likely to sharply increase on account of the pandemic. Therefore, BAFS is rated one-notch lower than CP ALL.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
A decrease in uplift volume of 52%-53% in 2020, with a recovery to about 70% of pre-pandemic levels in 2021 and 90% in 2022A decrease of 24%-25% in FPT's revenue in 2020The second phase of the oil pipeline project in northern Thailand to be completed by the end of 2020, to start generating revenue in the beginning of 2021; this should see FPT's revenue growth reach 52%-54% in 2021 and about 40% in 2022A sharp decrease in the EBITDA margin to 27%-28% in 2020, then to increase to about 40% in 2021 and 52%-53% in 2022Capex of about THB1.8 billion in 2020, THB850 million-870 million in 2021, and THB400 million-450 million in 2022, including investments in the oil pipeline project and to step up operations as Don Muang Airport expands.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
FFO net leverage remaining above 5.0x beyond 2021
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The Outlook could be revised to Stable if the pace of recovery in air traffic and BAFS's uplift volume are faster than we expect, resulting in FFO net leverage falling to below 5.0x on a sustained basis.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: BAFS's liquidity is healthy, supported by an adequate cash balance and a well-structured debt maturity profile. BAFS had a current portion of long-term loans of THB530 million due over the next 12 months at end-2019, while its readily available cash balance and Fitch-defined liquid investment were THB2.0 billion. Liquidity is also supported by an undrawn committed facility of THB1.1 billion. In addition, BAFS issued THB1 billion in debentures and secured additional project finance facilities of THB1.1 billion in 1Q20. Available liquidity should be sufficient to finance the remaining capex for the north pipeline project.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com