Fitch Ratings: Dispute Settlement Costs Trim DTAC's Rating Headroom

          The announcement by Thailand's third-largest mobile operator, Total Access Communication Public Company Limited (DTAC; BBB/AA(tha)/Stable), that it has agreed to a settlement with state-owned CAT Telecom Public Company Limited (CAT) potentially reduces certain uncertainties about their disputes over a concession agreement that ended in September 2018. However, the settlement cost of THB9.5 billion reduces DTAC's rating headroom, Fitch Ratings says. 
          DTAC will be able to easily manage the THB9.5 billion settlement as it had a cash balance of THB26 billion at end-September 2018. However, if the company proceeds with the payment, it will increase our projected FFO adjusted net leverage for DTAC for 2019 to 2.4x, from 2.1x, close to the 2.5x level at which Fitch would consider negative rating action. Its financial leverage was 1.7x at end-September 2018. 
          Fitch expects DTAC's market position to strengthen in 2019, after winning 1.8GHz and 900MHz spectrum. This should help plug the gap in its spectrum portfolio and network quality that has constrained its competitiveness over the past few years. Nevertheless, meaningful network improvements and brand re-building could take a few more quarters to take effect, suggesting EBITDA recovery may take place only in 2020. This should allow it to maintain leverage within Fitch's negative rating guideline of 2.5x.
          The announced settlement is yet to be approved by the shareholders. The arrangement does not cover the disputes between the two parties in their entirety, including certain disagreements over revenue-sharing relating to excise tax and interconnection charges. 
          We expect private telecom operators, including DTAC, to benefit from Thailand's transition to a licence regime since 2012 from a model of concession agreements between government-owned telecom operators and private operators that governed their 2G operations. The new framework is more transparent and provides a more level playing field to operators like DTAC.