OREANDA-NEWS. Fitch Ratings (Thailand) Limited has affirmed the National Long-Term Rating of 'A(tha)' on CP ALL Public Company Limited's (CP ALL; A+(tha)/Stable/F1(tha)) senior unsecured bonds, the issue size for which has been increased to up to THB20bn from THB18bn previously.

The bonds will be issued in two tranches due in 2017 and 2020. The proceeds from the bonds will be used to refinance some of CP All's existing bank loans.

Fitch rated the bonds 'A(tha)', based on the previous issue size, on 24 February 2015.

KEY RATING DRIVERS
Proposed Notes Notched Down: The proposed senior unsecured notes are notched down one level below CP ALL's 'A+(tha)' National Long Term Rating due to the significantly large prior ranking debt, which was 6.2x EBITDA at 31 December 2014.

Leading Market Position: CP ALL is the largest operator in Thailand's convenience store sector, with more than 8,000 stores nationwide. It has a domestic market share of about 60%, in terms of number of stores, far more than the second-largest operator. CP ALL is likely to maintain its leading position despite intense competition because of its large network and area of coverage, along with well-established functions such as logistics, supply and maintenance, staff training and development, to support its position.

Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.

Diversifying into Wholesale: The acquisition of Makro - the market leader in modern food wholesaling stores in Thailand - was CP ALL's first foray into the wholesaling business. This transaction both increases and broadens the company's customer base to create Thailand's largest company in the food retail sector.

Defensive, but Strong Growth: CP ALL benefits from the "defensive" cash-flow nature of the sector, which sells products essential to everyday life, with low revenue and margin volatility; while its growth potential is underpinned by Thailand's immature market for modern food retailers. CP ALL's strong growth over the medium term is likely to continue, propelled by the opening of new stores and like-for-like (LFL) sales growth, despite a negative LFL growth for 7-Eleven stores in 2014.

Weak Credit Metrics: CP ALL's financial leverage is likely to improve over the next four to five years, given its expected strong cash-flow generation. Makro's aggressive expansion plans caused negative free cash flow (FCF) in 2014. However, Fitch expects the deleveraging will be only slightly delayed with funds from operations (FFO)-adjusted net leverage to be reduced to 5.0x-5.5x by 2015, and to below 3.5x by 2017 from 6.9x at end-2014.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- 15%-20% growth in total revenue in 2015, driven by new store openings;
- Profit margin moving in a narrow range;
- Opening of 600-650 new 7-Eleven stores per year and 10-15 new Makro stores per year

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A slower-than-projected deleveraging with FFO-adjusted net leverage remaining significantly above 5.0x in 2015 and above 3.5x in 2017
- A deterioration in EBITDAR margin to below 8.5% on a sustained basis (2014: 9.7%)
- Negative free cash flow generation for two consecutive years

Positive rating action over the next 12-24 months is unlikely due to the company's high financial leverage.