OREANDA-NEWS. Fitch Ratings (Thailand) Limited has assigned a 'BBB+(tha)' National Long-Term Rating to WHA Corporation Public Company Limited's (WHA, BBB+(tha)/Negative) new senior unsecured debentures of up to THB2.5bn due in 2019 and 2020.

The debentures are rated at the same level as WHA's National Long-Term Rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The proceeds of the debentures will be used to refinance some existing loans and fund working capital requirements.

KEY RATING DRIVERS

High Financial Leverage: WHA's consolidated financial leverage rose significantly in 2015 because the acquisition of Hemaraj Land and Development Public Company Limited (Hemaraj) was mainly financed via debt of THB32bn. About 80% of this debt is due by mid-2017. Fitch expects WHA's FFO-adjusted leverage to be 5.0x-5.5x after it repays the debt due by mid-2017. The loans will be repaid by proceeds from asset disposals and cash savings from reducing capex.

Reliance on Asset Disposals: The Negative Outlook on the company's rating reflects the uncertainty about the company's deleveraging plan. Most of the sources of funds for the debt repayment will come from asset disposals, which are subject to market conditions. This could affect the valuation as well as the timing of the disposals. Sales of non-core assets of Hemaraj and sales of WHA's office buildings to a REIT have been carried out as planned in 2015 with total proceeds of about THB5bn. In contrast, sales of Hemaraj's ready-built factories and warehouses to a REIT is behind the schedule due to a delay in setting up of the new REIT. The company expects sales of Hemaraj's properties to be completed in September 2016. Debt reduction in 2015 was less than our projection - albeit by less than THB2bn - as the company had proceeds from the exercise of warrants of THB3.2bn and it spent less than expected on project development, which partially offset the lack of proceeds from the sale of Hemaraj's factories and warehouses.

More Integrated Business Model: The Hemaraj acquisition has strengthened WHA's market position in the industrial property business, supporting its leadership in the development of both premium built-to-suit warehouses for lease and industrial estates in Thailand. Its operating scale, in terms of revenue (not including Hemaraj's sales of investment properties to a REIT), will likely increase to THB13bn-14bn in 2016-2017 from less than THB5bn in 2014. The proportion of recurring revenue (not including share of net profit and loss from Hemaraj's affiliates in power business) to total revenue should rise to about 25% from 10% previously, mainly from Hemaraj's utility service business for its industrial estates.

Larger Exposure to Cyclicality: The expansion into industrial estate development has increased WHA's exposure to volatility of land sales and cyclicality of property demand as well as higher competition. WHA's original business of developing premium built-to-suit warehouses for lease limited its exposure to property market cycles, because the warehouses are pre-leased and have long-term contracts. The competition in its niche market is also relatively low.

Temporary Structural Subordination: WHA's senior unsecured debt could be structurally subordinated to the acquisition loans, which were taken by the subsidiary that directly holds the shares in Hemaraj. Dividends from Hemaraj, mainly from the sales of assets specifically earmarked for loan repayment, are likely to be used to repay the loans at this subsidiary. Most of the loans are due by mid-2017, and the structural subordination is, therefore, temporary and likely to be limited.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- About 20% increase in total revenue (not including Hemaraj's sales of investment properties to a REIT) in 2016
- EBITDA margin at 35%-38% in 2016
- A 40%-45% reduction in capex on land acquisition and project development costs by WHA and Hemaraj in 2016 from the 2014 level

RATING SENSITIVITIES

The rating on the debentures is sensitive to any changes in WHA's National Long-Term Rating.

Positive: Future developments that may, individually or collectively, lead to positive rating action and/or revision of the Outlook to Stable include:
- Consolidated FFO-adjusted leverage falling below 5.5x on a sustained basis, or
- More evidence on the progress of the asset disposal plan and debt repayment

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Consolidated FFO-adjusted leverage rising above 5.5x on a sustained basis.