Fitch Rates CP ALL's Unsecured Bonds 'A(tha)'
The bonds, which will total up to THB15bn, will be issued in four tranches due in 2018, 2020, 2022 and 2025. The proceeds from the bonds will be used to refinance some of CP All's existing bank loans.
KEY RATING DRIVERS
Notched Down from Issuer Rating: The senior unsecured notes are notched down one level from CP ALL's 'A+(tha)' National Long Term Rating due to the significant amount of prior ranking debt, which was 6.2x EBITDA at end-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 now has the second-largest number of 7-Eleven stores in the world 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 three to four 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 fall to 5.0x-5.5x by 2015, and to below 3.5x by 2017 from 6.5x at end-1Q15.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- 15%-20% growth in total revenues in 2015, driven by new store openings;
- Profit margin moving in a narrow range;
- 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 (1Q15: 10.4%)
- 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.
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