Fitch Ratings (Thailand) has affirmed Bangkok Aviation Fuel Services Public Company Limited’s (BAFS) National Long-Term Rating at ‘BBB+(tha)’ and maintained the Negative Outlook.
BAFS recently granted a subsidiary of Bangchak Petroleum Public Company Limited the right to manage a part of subsidiary Fuel Pipeline Transportation Company Limited’s (FPT) pipeline system (Bangkok to Bang Pa-in) for 20 years. This provides clarity on BAFS’ capex financing sources over the next 18 to 24 months, as the proceeds will be partly used to finance capex projects without incurring additional debt.
BAFS’ deleveraging could be slightly slower than we previously expected on the loss of cash flow from the part of the pipeline system under right transfer agreement, but it does not bear any associated volume risk.
The Negative Outlook reflects the risks on the deleveraging pace, with funds flow from operations (FFO) net leverage not reaching around 6.0x or lower by end-2023, mainly on uncertainty about the global air travel recovery created by the Omicron Covid-19 variant.
KEY RATING DRIVERS
Deleveraging from a High Level: Fitch expects FFO net leverage to surge to about 35x in 2021 (2020: 23x), before dropping to 10x-11x in 2022 and about 6x in 2023. This deleveraging pace is slightly slower than we had previously projected because of the loss of cash flow under the right transfer agreement. Still, such loss is partly compensated by the fact that the proceeds from the right transfer will be used to reduce debt from the repayment of FPT’s project financing loans of THB500 million in early 2022. The proceeds will also fully finance capex for the pipeline connection project.
Fitch expects deleveraging to start in 2022, mainly supported by a gradual recovery in the aviation business after Thailand reopened its borders on 1 November 2021. Omicron has caused the recent imposition of more stringent measures in accepting inbound tourists, although those travel restrictions are more relaxed than previous Covid-19 measures in 2020-2021. The newly acquired solar energy businesses should also provide additional stable cash flow, but this is likely to be low compared with investment costs.
Lower Risk on Pipeline Business: BAFS will no longer bear volume risk from the part of the FPT pipeline under the 20-year right transfer agreement. The upfront THB1.6 billion proceeds from the transfer will fund the overdue pipeline connection project. The project should strengthen FPT’s pipeline business as it will allow FPT’s pipeline system to serve larger fuel volumes, mainly from the eastern seaboard of Thailand, and should help shorten the break-even period of its whole north pipeline system.
Contribution from FPT is likely to be stagnant in 2022-2023, as the contribution from the north pipeline system should take some time to ramp up and make up for the loss of cash flow generated by the part of the pipeline under the right transfer agreement. However, the pipeline connection is likely to accelerate the fuel volume transportation after the scheduled completion at end-2023 or early 2024.
Gradual Near-Term Recovery: Fitch expects 2022’s uplift volume – the amount of fuel supplied to aircraft – to recover to about 55% of pre-pandemic levels and to about 85% by 2023, supported by Thailand’s November reopening and rising global vaccination rates. We do not expect a rapid pace of recovery, as vaccination rates differ between advanced and emerging markets and there is a possibility of a resurgence in the pandemic. However, our projections are based on the assumption that any renewed mobility restrictions will be localised, short-lived and less severe than in 2020.
Limited Exposure to Oil Prices: BAFS is insulated from fuel-price volatility, as its revenue is derived solely from fuelling service fees, with fuel being sold by oil companies to airlines. BAFS’ major cost is its pre-agreed concession fee, resulting in stable profitability. BAFS faces low competition under its concession-based business model.
Stable Renewable Earnings: Aviation business prospects are likely to be weaker than prior to the pandemic, but BAFS’ expansion into renewable energy should support its business profile over the medium term via stable cash flow, subject to resource variability risk. The renewable projects benefit from power-purchase agreements (PPA) with an average tenor of around 20-25 years and strong counterparties – the Provincial Electricity Authority of Thailand and leading electric-power companies for the projects in Japan.
BAFS’ operating cash flow profile is close to that of Navanakorn Electricity Generating Company Limited (NNEG, A-(tha)/Stable), a small local power plant that contracts 70%-80% of revenue under a long-term take-or-pay PPA with state-owned Electricity Generating Authority of Thailand (BBB+/Stable).
Both companies face low competition risk. However, the pandemic’s impact on the global aviation industry has temporarily affected BAFS’ cash flow, while NNEG’s operations have so far been more resilient. BAFS has a larger operating scale and greater diversification than NNEG, which has single-asset risk and no business diversification. BAFS’ previously lower financial leverage is now much higher than NNEG’s because of the pandemic and is likely remain so over the medium term after BAFS’ large investments in 2021. The significantly weaker financial profile results in Fitch rating BAFS one notch below NNEG.
BAFS’ cash flow profile is also similar to that of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable, Standalone Credit Profile (SCP): a-(tha)). Like BAFS and NNEG, GPSC has highly predictable and stable earnings, supported by long-term take-or-pay PPAs. Even so, GPSC has a stronger business profile on superior asset diversification, revenue and earnings. GPSC’s financial leverage is lower than that of BAFS, but GPSC has large capex and investment plans. So financial leverage is likely to be in a similar range for both companies over the next two to three years. BAFS is therefore rated one-notch below GPSC’s SCP.
Similar to BAFS, the pandemic has significantly affected Siam Future Development Public Company Limited (SF, BBB-(tha)/Stable), a leading community-mall developer in Thailand. SF has high earnings visibility, supported by medium- to long-term contracts with tenants, but it has been providing high rental rebates to tenants affected by the pandemic. SF has a smaller operating scale and faces more competition than BAFS, but we expect financial leverage to be in a similar range for both companies over the medium term. Therefore, we rate BAFS higher by two notches on its significantly stronger business profile.
Fitch’s Key Assumptions Within Our Rating Case for the Issuer:
- A recovery in uplift volume to about 55% of pre-pandemic levels in 2022 and 85% in 2023 (2021:26.7%);
- FPT’s revenue growth of about 8% in 2021 with transmission volume at a similar level to that in 2020, supported by the full operation of the second phase of the north pipeline project from September 2021 and rising ground product compensating for a 28%-29% fall in jet fuel transmission volume;
- FPT’s revenue to drop by 50%-52% in 2022, reflecting the right transfer of FPT’s operations in Bangkok to Bang Pa-In and growth of 34%-35% in 2023;
- A further decrease in the EBITDA margin to 14%-15% in 2021 (2020: 17.4%), rising to 40% in 2022 and 53%-55% in 2023 amid a recovery in uplift volume;
- Capex of about THB1.1 billion in 2021, about THB800 million in 2022 and THB950 million-THB1 billion in 2023, including capex for pipeline connection project;
- No dividend payment from BAFS in 2022 and a small interim dividend payment in 2023.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook could be revised to Stable if BAFS’ FFO net leverage falls to about 6.0x by 2023.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO net leverage remaining above 6.0x beyond 2023.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: BAFS had total debt of THB13.7 billion at end-September 2021, of which about THB1.5 billion is due within the next 12 months. Nonetheless, THB320 million was previously rescheduled to 2023 after end-September 2021, while THB700 million of the amount due is a short-term loan that can be renewed if needed. The right transfer agreement on a part of FPT’s pipeline system at end-2021 means BAFS has plenty of liquidity with proceeds of THB1.6 billion from the transaction. BAFS has agreed to repay THB500 million of a long-term loan in 2022.
BAFS’ liquidity is also supported by its readily available cash balance and Fitch-defined liquid investments of THB1.1 billion, as well as undrawn committed credit facilities of THB500 million as of end-September 2021.
BAFS is the sole operator of the fuel depot and hydrant system and is a major fuelling service provider at Thailand’s two largest airports. A 70%-owned subsidiary operates the pipeline from fuel depots in Bangkok to both airports and owns the only pipeline to Thailand’s north. BAFS also owns solar generation projects, with capacity of 36MW in Thailand and 13MW in Japan.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.