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Fitch Downgrades BTS to ‘A-(tha)’; off RWN; Outlook Negative

          Fitch Ratings (Thailand) Limited has downgraded the National Long-Term Ratings on BTS Group Holdings Public Company Limited (BTS Group) and Bangkok Mass Transit System Public Company Limited (BTSC), and senior unsecured ratings on BTSC to 'A-(tha)' from 'A(tha)'. The ratings have been removed from Rating Watch Negative (RWN) and Negative Outlooks have been assigned. A full list of rating actions is at the end of this commentary.
          The downgrade reflects Fitch's expectation that BTS Group's financial profile will deteriorate over the medium term due to its high debt-funded investment in Bangkok's new urban rail projects, the Pink and Yellow lines. BTS Group will have far less financial flexibility over the next two to three years as it incurs additional interest costs on debt to fund these projects. BTS Group's equity injection in those projects of THB21.6 billion, which is likely to be mostly debt-funded, will put pressure on the company's leverage and financial flexibility. Fitch deconsolidates the Pink and Yellow lines projects' cash flow and debt due to the ring-fencing at project level. However, if there is a change in risk containment at the project level, Fitch may reconsider consolidating the projects. 
          The ratings also capture the improvement in BTS Group's business profile as its transit route coverage will continue to expand with feeders to its core network. Also, the plan to divest its property business in the financial year ending 31 March 2018 (FY18) will reduce the company's exposure to a cyclical business. 
          The Negative Outlook reflects Fitch's expectation that BTS Group's leverage will remain high during FY18-FY20. In addition, there is uncertainty about cash flows from the divestment of the property business, cash flows from the electrical and mechanical system supply and installation project for the Green lines extensions (E&M project), as well as the timing of receipt of operational and maintenance (O&M) revenue from the future mass transit lines. A delay in deleveraging pace, due to lower-than-expected cash flow, could lead to negative rating action. 

          KEY RATING DRIVERS
          High Leverage, Lower Flexibility: Fitch expects BTS Group's FFO adjusted net leverage to surge to 12x in FY20, and reduce to 6x in FY22. This is mainly driven by high debt-funded investments in the mass transit business - the E&M project and equity injection in the new Pink and Yellow lines projects. The major cash inflows to support the deleveraging include the expected proceeds from divestment of the property business in FY18, a lump sum payment for the E&M project in FY21, and the growth of its future operating cash flow.
          BTS Group and BTSC have limited headroom for their 'A-(tha)' ratings. Additional interest costs incurred on debt associated with the E&M project will reduce the companies' debt-service coverage from cash flow. Any increase in investments, weaker-than-expected cash generation in the medium term, or a debt structure that adds high debt-servicing costs could have negative impact on ratings.
          Steady Operating Cash Flow: After the divestment of the property business, about 90%-95% of BTS Group's revenue will come from the mass transit and out-of-home (OOH) media businesses, which are cash generative and generally stable. More than half of the group's media revenue was related to the BTS sky-train network, while the mass transit business stipulates pre-agreed revenue under O&M agreements for the extensions to BTS sky-train core network. BTS Group also receives fairly stable dividends from its 33% holding in the BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF), which owns the net fare box revenue of the core network. 
          Growing Scale and Market Position: BTS Group has a strong business position in Bangkok's mass-transit sector. Its ridership market share as of December 2016 was 66%, according to the company. The group's recent expansions should strengthen its business profile by widening its operating network, increasing O&M revenue, and boosting EBITDA. The company's network coverage is planned to expand to 132 kilometres once the new lines are completed from the current 38 kilometres, while the extended Dark Green, Pink and Yellow lines will feed traffic from residential suburbs to the existing BTS sky-train system and enlarge its transit-media capacity. 
          Fitch expects BTS Group's EBITDA from transit business (including dividends from BTSGIF) to increase to about THB5 billion in FY22 from THB2 billion in FY17, mainly from additional O&M fees of those new lines. Although BTSC is not the concessionaire for the Pink and Yellow lines, it has been appointed as the O&M operator and will receive a pre-agreed O&M fee.
          BTS Group-BTSC Ratings Equalised: We rate BTS Group and BTSC on a consolidated basis, given the strong operating and strategic linkages between the parent and subsidiary as per Fitch's Parent and Subsidiary Rating Linkage criteria. 

          DERIVATION SUMMARY
          The ratings of BTS Group and BTSC, at 'A-(tha)', reflect the group's strong business profile as a leading mass transit and OOH media operator in Thailand, which is offset by its high financial risk profile to fund large investments in the mass transit segment. Compared with Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable), BTS Group operates in a more stable transit business which generates stable operating cash flow and higher profitability. However, its benefits over the near future are offset by its weakening financial profile, as the mass transit expansions require large capex and have a very long payback period. 
          BTS Group's peers that have predictable and stable earnings due to low competition, such as Bangkok Aviation Fuel Services Public Company Limited (A+(tha)/Negative) and Global Power Synergy Public Company Limited (A+(tha)/Stable), are rated at higher levels because they have lower financial risk profiles. 

          KEY ASSUMPTIONS
          Fitch's key assumptions within our rating case for the issuer include:
          - EBITDAR margin of 30%-35% for BTS Group and 38%-46% for BTSC over the next three years
          - Recognition of additional O&M fees to start in FY18 for the Green lines extensions and in FY22 for the Pink and Yellow lines 
          - Net proceeds of THB8.5 billion from divestment of the property business in FY18
          - Capex of about THB17 billion for BTS Group and THB15 billion for BTSC over the next five years, excluding investments in E&M works for the Green lines extensions and the equity injection for the Pink and Yellow lines
          - Equity injection in the Pink and Yellow lines of THB21.6 billion in FY18-FY22 
          - Receive of the full payment for E&M project in FY21
          - Reducing dividend payment from FY18 as the special dividend was completed in FY17

          RATING SENSITIVITIES
          Developments That May, Individually or Collectively, Lead to Revision of the Outlook to Stable 
          - Evidence that the proceeds from the asset disposal plan and cash flow generation are used for the deleveraging, with FFO adjusted net leverage reaching 6.0x in FY22 (FY17: 5.3x), while maintaining the FFO net cash interest coverage at above 3.0x (on projected basis) for BTS Group (FY17: net interest received)
          - Any rating action on BTS Group would lead to the same rating action on BTSC

          Developments That May, Individually or Collectively, Lead to Negative Rating Action 
          - FFO net cash interest coverage at below 3.0x for BTS Group
          - Weaker-than-expected cash flow generation, higher-than-expected investment, or delayed payment for the E&M project leading to a slower-than-expected deleveraging and FFO-adjusted net leverage of BTS Group remaining above 6.0x in FY22 (on projected basis)
          - A significant increase in business risks due to an investment in unrelated businesses

          LIQUIDITY
          Sufficient Liquidity: BTS Group's liquidity is supported by a freely available cash balance and liquid investments (Fitch-adjusted) of THB21.4 billion at FYE17, which is enough to cover its debt maturing over the next 12 months of THB14.5 billion. We expect BTS Group's FCF to be negative in FY18-FY20, but this should be supported by its ability to access the local debt market, available bank credit facilities (uncommitted) of about THB34.1 billion, and other investments (mainly ready-for-sales equity) of THB13.8 billion (Fitch- adjusted) at FYE17. 

          FULL LIST OF RATING ACTIONS
          BTS Group Holdings Public Company Limited
          -- National Long-Term Rating downgraded to 'A-(tha)' from 'A(tha)', removed from RWN; Outlook Negative

          Bangkok Mass Transit System Public Company Limited
          -- National Long-Term Rating downgraded to 'A-(tha)' from 'A(tha)', removed from RWN; Outlook Negative
          -- Senior unsecured debentures downgraded to 'A-(tha)' from 'A(tha)', removed from RWN