Moody's Downgrades True Corp and True Move; Outlook Negative
Published on: 6th Mar 2014
By: Ian Mansfield
Moody's Investors Service has downgraded to Caa1 from B3 the corporate family rating of True Corp as well as the corporate family and senior unsecured bond ratings of its consolidated subsidiary True Move.
The outlook for all ratings is negative.
"The rating actions reflect True Corp's vulnerable business and financial profile, despite the company having lowered its debt levels by selling assets to the infrastructure fund that it established in the fourth quarter of 2013," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst.
True Corp established the infrastructure fund -- the True Growth Fund (TRUEGIF) -- in December 2013 and sold its existing and future tower assets to TRUEGIF to reduce debt.
However, the net cash proceeds from the sales amounted to THB39 billion, which was at the lower end of the company's original plan to raise between THB40-THB66 billion.
In addition, part of the proceeds (THB16 billion) was an advance payment for the construction of 6,000 telecommunications towers, which True Corp will have to deliver over the next two years.
True Corp currently holds approximately 33% of TRUEGIF which it now accounts for as an associate.
While its total debt declined to THB90 billion at end-2013 from THB113 billion at end-September 2013, True Corp's debt level is likely to increase to over THB100 billion by end-2014, given its ongoing negative free cash flow (FCF).
Moody's expects that True Corp's negative FCF in 2014 will total approximately THB20 billion in 2014, due to: (1) the company's weak earnings from its mobile business; (2) its ongoing large investments in 3G and 4G services; as well as (3) the potential for additional spectrum fee payments, following the 1.8 GHz spectrum auction in 2014.
At the same time, its short-term debt -- which includes rated notes amounting to USD10.7 million (THB353 million) due on 1 August 2014 -- totaled THB14 billion, while its cash holdings as of December 2013 totaled THB15 billion.
Thus, the company will likely continue to depend on borrowings from domestic banks -- including drawdowns from unused committed bank lines -- as well as funding from the local currency bond markets to address its financing gap.
As a result, Moody's expects True Corp's adjusted debt/EBITDA to increase to 6.5x-7.0x in 2014, although the ratio declined to below 5.0x in 2013, due largely to its reduction of debt in 4Q 2013.
Since True Corp plans to lease the disposed assets from its infrastructure fund, its adjusted leverage in 2014 will rise, as Moody's will make operating lease adjustments to estimate True Corp's adjusted debt levels.
Given the expected debt increase, Moody's believes True Corp will likely require covenant waivers when covenant tests on its bank facilities commence in September 2014.
Moreover, its equity can become negative in 2014, if timely recapitalization does not occur. Its reported shareholders' equity decreased to about THB4.7 billion as of December 2013, from THB5.6 billion as of September 2013, despite THB6 billion in gains from the sale of assets to TRUEGIF. It incurred a net loss of THB9 billion in 2013 and THB7 billion in 2012.
While Thai banks and its major shareholder, the Charoen Pokphand Group (unrated), have been supportive of True Corp, Moody's believes True Corp's weak operating and financial profile has led to uncertainty as to whether or not such solid support will continue.
The negative outlook reflects Moody's view that without major restructuring and recapitalization measures, True Corp's operating and financial profile will remain vulnerable, given its prolonged negative FCF, high leverage, potential covenant breaches, and weak equity base.
Given the negative outlook, an upgrade of the company's ratings is unlikely in the near term. However, the outlook could revert to stable if it significantly improves its financial and liquidity profile by: (1) improving its earnings and FCF; (2) reducing its debt; (3) restoring its equity base; and (4) complying with its financial covenants. Specific metrics Moody's will consider include: adjusted debt/EBITDA below 6.0x-6.5x on a sustained basis; and negative FCF below THB5-THB10 billion.
On the other hand, downward ratings pressure could emerge if the company's negative FCF is unlikely to decline significantly, thereby affecting its ability to obtain funding from domestic banks and the bond markets, or if it is unable to obtain waivers for its financial covenants.
Moody's notes that the standalone financial profile of True Corp's consolidated subsidiary, True Move -- which provides 2G mobile services -- is weaker than that of True Corp.
Nevertheless, Moody's rates True Move at the same level as True Corp, largely because True Move's bank debt and bonds are guaranteed by True Corp's mobile subsidiaries that offer mainly 3G services.
In addition, given the strategic importance of the mobile business, Moody's believes that True Corp will support True Move in times of need.