True Corp Debt Ratings on Upgrade Review Following China Mobile Deal
Published on: 11th Jun 2014
Following the announcement that China Mobile is buying an 18 percent stake in Thailand's True Corp, Moody's has place the Thai firm's debt under review for a possible upgrade.
"The rating actions follow True Corp's announcement on 9 June that it plans to raise additional capital funds of about THB65 billion (approximately $2 billion) through a rights offering to its existing shareholders and a private placement to China Mobile. This transaction, if successful, would help the company to significantly improve its leverage and restore its equity base," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst.
True Corp plans to use approximately 80% of the projected THB65 billion in cash proceeds to reduce its debt. As a result, the company expects pro forma March 2014 reported debt to decrease from THB95 billion to THB43 billion.
Based on its plan, Moody's estimates that its adjusted debt/EBITDA would fall below 4.0x-4.5x in December 2014.
Prior to the announcement of the transaction, Moody's had expected adjusted debt/EBITDA to increase to 6.5x-7.0x in December 2014 from 4.8x for the 12 months to March 2014, given 1) True Corp's ongoing negative free cash flow (FCF) -- due in turn to a high level of investments in 3G and 4G -- and 2) the expected increase in operating lease payments to its infrastructure fund.
Moody's makes operating lease adjustments to estimate True Corp's adjusted debt levels.
The planned transaction could also allow the company to improve its weak equity base. Its reported shareholders' equity could increase to over THB70 billion from THB8.6 billion as of March 2014 having been eroded after several years of net losses.
Post the transaction, China Mobile will hold 18% of the total issued and outstanding shares of True Corp and become its second largest shareholder. China Mobile will also have the right to nominate 2 of 18 board members according to True Corp. Furthermore, True Corp and China Mobile intend to explore business cooperation after the completion of the transaction.
"The business cooperation with China Mobile would provide True Corp with an opportunity to leverage on China Mobile's technology and scale. China Mobile is a leader in time division-long-term evolution (TD-LTE) technology and the world's largest mobile operator by subscriber numbers," says Takahashi, the Lead Analyst for True Corp and China Mobile.
The Charoen Pokphand Group will remain the largest shareholder in True Corp with a stake of approximately 50%. CP Group has stated its intention to underwrite any unsubscribed shares under the rights offering.
True Corp expects to complete the transaction by the end of August or early September after shareholder and any necessary regulatory approvals have been obtained.
Based on True Corp's disclosures it plans on repaying all of its outstanding bank debt, which should remove all financial covenant tests. Should there be any delay in the planned transactions, then True Corp may have to obtain covenant waivers when covenant tests on its bank facilities commence in September 2014.
If True Corp completes the transaction as outlined and uses proceeds to repay bank debt such that leverage reduces to below 4.0x and concerns over compliance with financial covenants fall away, then the review could result in the ratings being upgraded by at least two notches.
Moody's notes that True Move is rated 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.