Fitch Ratings (Thailand) Rates Bangkok Aviation Fuel Services’ Subordinated Debentures at ‘BBB+(tha)’ with Negative Outlook

Fitch Ratings (Thailand) Limited has announced the National Long-Term Rating on Bangkok Aviation Fuel Services Public Company Limited’s (BAFS) subordinated capital debentures (National Long-Term Rating). at ‘BBB+(tha)’, with a negative outlook) at ‘BBB-(tha)’.

Such subordinated debentures in the amount of not exceeding Baht 1 billion will be redeemed upon the dissolution of the company with the issuer’s right to early redemption and unconditional right to defer interest payment. The proceeds from the issuance of the subordinated debentures will be used for capital expenditure and loan repayment.

Such subordinated debentures It is rated two notches below BAFS’ National Long-Term Rating of ‘BBB+(tha)’ according to Fitch’s ‘Corporate Hybrids Treatment and Notching Criteria’. This reflects a subordinated position which tends to have to absorb higher than normal losses. compared to other debts of the company

Fitch has assigned the subordinated notes to 50% equity credit in accordance with Fitch’s “Corporate Hybrids Treatment and Notching Criteria” rating criteria. The subordinated debentures consist of: subordinated status Having a probable maturity (Effective Maturity) remaining over 5 years, the issuer’s right to defer interest payment and a very limited set of defaults. Equity debt is capped at 50% because deferred interest must be accumulated for future payment.

The subordinated debentures are not perpetual, and Fitch assumes a probable redemption date.

(Effective maturity) is the 50th maturity date from the issuance date. Since the interest rate of such subordinated debentures will increase by more than 1 percent from the year 51 onwards, the debt capitalization will be reduced from 50 percent to 0 when the expected redemption period is Remaining less than 5 years

Factors Affecting Credit Rating

Continued Decline in Leverage: Fitch expects BAFS’ leverage to continue to decline in 2023-2024, driven by a significant recovery in the aviation refueling business. After almost every country has opened the country. Fitch expects BAFS’ EBITDA net leverage to decline to approximately six times in 2023 and approximately five times in 2024 (15.2 times 2022). will recover to about 84% of pre-coronavirus levels in 2023 and 98% in 2024.

Fitch has not significantly revised our 2023-2024 projections. Although the amount of aircraft refueling in 2022 is lower than expected Due to the measures to prevent the spread of the coronavirus in China. in the second half of 2022, with BAFS’ refueling volume in 2022 at 49% of pre-coronavirus levels. This is about 55 percent lower than Fitch’s estimate.

that China has opened up the country since January 2023 should support the return of Chinese tourists in the second half of 2023 and 2024.

Positive Free Cash Flow Despite High Capital Expenditure: Fitch expects BAFS to achieve positive free cash flow in 2023 and 2024 due to its strong operating cash flow. rising should be sufficient to support investment expenses and higher dividend payments BAFS’ capital expenditures are expected to increase to about Bt900 million-Bt1 billion per annum in 2023 and 2024 from Bt287 million in 2022, mainly for the pipeline connection project. oil

BAFS still has plans to expand its renewable energy business. But the investment is likely to be cautious. Fitch expects the company to continue to expand after 2023. However, the debt-funded investment is likely to continue. As happened in 2021, it will increase the debt ratio. and greatly delayed the reduction of the debt ratio.

Revenue share from the oil pipeline business remains low: the company’s revenue and profit share Fuel Pipeline Transportation Limited, a subsidiary of BAFS, will remain low in 2023 as the increase in the volume of oil transported through the pipeline system to the upper northern region will likely take time to offset. Decrease in cash from granting the right to manage the oil pipeline system from Bangkok to Bang Pa-in to a subsidiary of Bangchak Corporation Plc., BCP)

The volume of oil transported through the pipeline to the upper northern region in 2022 is approximately 20 percent lower than our estimates. oil to the north increase in 2025

Strong Business Position in Aviation Refueling Business: BAFS is the sole provider of Depot Service and Hydrant Pipeline Network and is the main provider of refueling. Jet fuel at Suvarnabhumi Airport, the largest international airport in Thailand Including being the only aircraft refueling service provider at Don Mueang Airport which is an international airport that serves low-cost carriers. BAFS is in a less competitive business as carriers have to obtain concessions from those airports. to be able to provide service

Limited exposure to oil price volatility: BAFS is not exposed to oil price volatility as BAFS only collects refueling charges from oil companies (where oil companies sell fuel to the fuel lines). In addition, the main cost of BAFS is the concession fee, which is a pre-agreed rate under the contract. As a result, BAFS’s profitability ratio is relatively stable. In addition, the aviation refueling business is a business with limited competition since it is a business that requires a concession to run its business.

Recurring Revenue from Renewables: BAFS’s expansion into renewables should support BAFS’ business profile in the next few years. from stable cash flow despite the risk of volatile energy sources Renewable power projects benefit from long-term power purchase agreements with an average life of 20-25 years with strong counterparties such as the Provincial Electricity Authority and leading companies in the electric power business for projects in Japan. Fitch expects BAFS’s solar business to provide stable EBITDA (including dividend income) of about Bt250 million per annum.

Rating Summary

The nature of BAFS’s operating cash flow is similar to that of Nava Nakorn Electricity Generating Public Company Limited (NNEG) (National Long-Term Rating at Nava Nakorn Electricity Generating Public Company Limited). A-(tha)/Stable Credit Outlook), which is a small power producer with 70-80% of its revenues from long-term power purchase agreements with the Electricity Generating Authority of Thailand. (BBB+/stable credit outlook)

Both companies therefore have low competitive risk. However, BAFS’ cash flow has been temporarily affected by the coronavirus pandemic affecting the global aviation industry. While the impact of NNEG’s business is much less, BAFS has a larger scale and better diversification than NNEG, which is concentrated in a single location and operates solely. BAFS’s debt ratio, which used to be below NNEG’s, has now significantly exceeded NNEG’s debt ratio due to lower profit margins caused by the coronavirus pandemic. and high investment in the oil pipeline and renewable energy businesses during 2020-2024. BAFS’ financial profile is weaker than NNEG’s, making BAFS one notch lower than NNEG’s rating.

BAFS’s operating cash flow profile is similar to that of Global Power Synergy Public Company Limited (GPSC) (A+(tha)/Stable/standalone credit profile of a-(tha). ) Like NNEG, GPSC has a consistent and predictable income. However, GPSC has a stronger business profile than BAFS due to better asset diversification and earnings.

GPSC’s leverage is currently lower than BAFS, but should rise to a similar level over the next few years.

Due to GPSC’s high capital expenditure, BAFS is rated one notch below GPSC’s standalone credit profile.

Fitch’s Key Assumptions Used in Projections

– Aviation refueling volume recovered to approximately 84% of pre-virus levels in 2023 and 98% in 2024 (49% in 2022).

– Profit before interest, taxes, depreciation and amortization ratio and amortization as a percentage of revenue (EBITDA margin) to increase to 52-55% in 2023 and 2024 (2022 is at 33.6) from the recovery of aircraft refueling volume

– Total capital expenditures of approximately 2.5 billion baht in 2023 and 2024, including investment in the oil pipeline connection project.

– Pay a low dividend in 2023 and pay a dividend of 80% of net profit in 2024.

Factors that may affect future credit ratings

Positive factors:

– The rating outlook could be revised to stable if the EBITDA net leverage ratio is reduced to approximately 6.0 times by 2023.

Negative factors:

– EBITDA Net Leverage ratio to remain above 6.0x after 2023

Adequate liquidity: BAFS has good liquidity. with sufficient cash and good debt repayment. BAFS has debt of Bt1.3bn coming due over the next 12 months, with cash (by Fitch’s definition) of Bt2bn at end-2022. BAFS is also supported by an undrawn committed facility of Bt1.1 billion at the end of 2022. The liquidity should be sufficient to support the investment in the welding project. oil pipeline system

By InfoQuest News Agency (29 May ’23)

Tags: BAFS, Bangkok Aviation Fuel Services, Fitch Ratings, bonds, credit rating, credit