Fitch Ratings (Thailand) Limited has today revised the Outlook of Siam Future Development Public Company Limited (SF) to Negative from Stable. At the same time, the agency affirmed SF’s National Long-term rating at ‘BBB+(tha)’, National Short-term rating at ‘F2(tha)’ and the National Long-term ratings on its outstanding senior unsecured debentures due 2010 and 2013 at ‘BBB+(tha)’. Simultaneously, the agency has assigned a ‘BBB+(tha)’ rating to SF’s new THB300m senior unsecured debentures due 2013.
The Outlook revision reflects SF’s lower-than-expected recurring income as a result of the discounts granted to and the discontinuation of contracts by some tenants, caused by the economic recession. Together with higher-than-expected investment and rising project investment costs, this may further hinder SF’s de-leveraging. Additionally, a delay in new project openings may cause the company’s leverage to remain high over the next one to two years.
SF’s 2009 revenues decreased by 13.4% from 2008 to THB1.4bn, mainly caused by a 63.3% decrease in finance lease income brought on by the smaller spaces of new rental units handed over during the year, compared with those handed over in 2008. A drop in the higher-margin finance lease income also caused the EBITDAR in 2009 to fall by 32% to THB598m while recurring rental and service income rose by 9.4% in 2009 to THB1.2bn. SF’s performance is below our projections, which is mainly a result of the fact that SF has granted a rental discount to some tenants affected by the economic recession, while some tenants discontinued their contracts. Nonetheless, the occupancy rate was maintained at 98%. Together with the higher than expected capex as a result of additional equity investment in the Mega Bangna project, though partly offset by proceeds from sales of Kao Yai project to the anchor tenant, its adjusted net debt to EBITDAR at end-2009 rose to 6.3x from 4.3x at end-2008. This is higher than the projected level of 5.2x-5.5x.
The rating could be downgraded if SF is unable to reduce its financial leverage (as measured by adjusted net debt to EBITDAR) to below 4.0x by 2012. This could arise as a result of slower than expected earnings growth or higher than expected debt funded investments. On the other hand, the Outlook could be revised back to Stable if recurring rental and service income becomes stronger and more stable, and that its net debt and financial leverage decline significantly to below 4.0x.
The ratings are based on SF’s strong market position and expertise in the Thai medium-sized shopping centre development business, and the high quality of its shopping centre portfolio with continued growth in gross leasable area (GLA). The high average occupancy rate of more than 90% since inception also provides comfort. However, the ratings are constrained by SF’s relatively high financial leverage due to its aggressive expansion and large investment in a new joint venture. However, this risk is partially mitigated by SF’s ability to collect upfront payments and rental deposits from anchor tenants to fund about 60% of the cost for each new project.
The still weak environment is also a concern for retail property operators in Thailand. Declining consumer confidence and spending could delay the opening of planned new projects and lower rental rate and/or occupancy rate, impacting the company’s earnings, liquidity and leverage.
Applicable Criteria is available on Fitch’s website at www.fitchratings.com: ‘Corporate Rating Methodology’ dated 24 November 2009.
Contacts: Somruedee Chaiworarat, Bangkok, +662 655 4762; Pimrumpai Panyarachun, Bangkok, +662 655 4752; Vincent Milton, Bangkok, +662 655 4755.