Fitch Revises Outlook on Bangkok Aviation Fuel Services to Negative; Affirms 'BBB+(tha)'

Wednesday 08 December 2021 09:24
Fitch Ratings (Thailand) has revised the Outlook on Bangkok Aviation Fuel Services Public Company Limited's (BAFS) National Long-Term Rating to Negative, from Stable, and has affirmed the rating at 'BBB+(tha)'.

The Negative Outlook reflects the risks to BAFS' deleveraging to a level that is consistent with its rating over the next 18-24 months. These include the emergence of the Omicron Covid-19 variant, which may result in renewed lockdowns and travel restrictions delaying a recovery in global air travel. This, in turn, may affect BAFS' earnings and keep its leverage at elevated levels.

We also believe the performance of BAFS' pipeline business, which is held under a subsidiary - Fuel Pipeline Transportation Company Limited (FPT) - will be weaker than we had expected over the next two to three years unless a high amount of additional capex is directed to the connection project. Nonetheless, the project's details and financing plan have not been finalised and we have not incorporated it in our forecasts.

High Leverage: Fitch expects fund flow from operations (FFO) net leverage to surge to 35x-40x in 2021 (2020: 23x), before dropping to about 10x in 2022 and 5x-6x in 2023. This is in line with our expectation of a recovery in the global aviation industry. The high financial leverage stems from weak air traffic, after a resurgence in the pandemic in 2H21 led to continued border closures and dampened air travel, as well as BAFS' recent aggressive and large, debt-funded investments of THB2.7 billion, mainly in solar energy projects in Thailand and Japan.

We expect deleveraging to start in 2022, supported by a gradual recovery in the aviation business, as Thailand re-opened its borders on 1 November 2021. The newly acquired solar energy businesses should provide additional stable cash flow, but this is likely to be low compared with investment costs.

Gradual Near-Term Recovery: Fitch expects 2021's uplift volume - the amount of fuel supplied to aircraft - to remain low, at 25%-30% of 2019 pre-pandemic levels, as overseas travel restrictions persisted for most of the year. Volume should recover to about 55% of pre-pandemic levels in 2022 and to about 85% by 2023, supported by Thailand's November re-opening 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 assumptions that any renewed mobility restrictions will be localised, short-lived and less severe than in 2020.

FPT Pipeline Under-Performance: Both phases of FPT's pipeline to northern Thailand have been fully operational since September 2021, but we forecast performance over the next year or two to be weaker than previously expected due to a delay in the pipeline connection project. FPT plans to connect its pipelines to another existing pipeline so it can serve the fuel depots in the country's eastern seaboard. BAFS says it will take four to five years longer for FPT to reach its initially projected transmission volume in the absence of the pipeline connection.

Additional Pipeline Capex: Connection investment costs have been found to be much higher than initially projected due to technical issues. However, we have not incorporated the capex and financing plan for the project in our projections, as project details, including the financing plan, are not yet finalised, and we have removed incremental revenue from our assumed pipeline connection in 2023.

Dominant Position in Fuelling Business: BAFS is the sole operator of the fuel depot and hydrant network at Suvarnabhumi Airport, Thailand's largest international airport, and a major into-plane fuelling service provider, with 89% market share. It is also the sole operator of refuelling services at Don Muang Airport, an international airport serving low-cost carriers. Competition is limited, as concessions from the airport operator are required to provide aviation fuel services.

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.

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 project benefits 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.

No Notching: We do not notch down BAFS' senior unsecured rating as we expect at least average recoveries for senior unsecured creditors. Almost all the prior-ranking debt is at key subsidiary FPT, resulting in subordination. Project debt at the solar projects adds to subordination. However, Thai Aviation Refuelling Company Limited (TARCO), the other key subsidiary that operates Suvarnabhumi Airport's hydrant system network, has minimal debt. Stable earnings post-2022 at BAFS and TARCO, BAFS' strong access to TARCO's cash flow and modest standalone debt will support average recoveries.

BAFS' operating cash flow profile is close to that of Navanakorn Electricity Generating Company Limited (NNEG, A-(tha)/Stable), a local small power plant that contracts 70%-80% of revenue under long-term take-or-pay power (PPA) with state-owned Electricity Generating Authority of Thailand (BBB+/Stable).

Both companies have highly predictable and stable earnings. However, BAFS' cash flow has been temporarily affected by the impact of the pandemic on the global aviation industry, 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 due to the pandemic and is likely remain so over the medium term due to BAFS' large investments in 2021. The significantly weaker financial profile results in us 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)). Similar to BAFS and NNEG, GPSC has highly predictable and stable earnings, supported by long-term take-or-pay PPAs. GPSC, nonetheless, has a stronger business profile due to superior asset diversification, revenue and earnings. GPSC's financial leverage is currently lower than that of BAFS, but both financial leverages are likely to be in a similar range over the next two to three years due to GPSC's large capex and investment plan. BAFS is therefore rated one-notch below GPSC's SCP.

Similar to BAFS, Siam Future Development Public Company Limited (SF, BBB-(tha)/Stable), a leading community-mall developer in Thailand, has been significantly affected by the pandemic. SF has high earnings visibility, supported by medium- to long-term contracts with tenants, but it has been providing high rental rebates to affected tenants amid the pandemic. SF has a smaller operating scale and faces more competition than BAFS, but we expect financial leverage to be at a similar range for both companies over the medium term. Therefore, we rate BAFS higher by two notches due to its significantly stronger business profile.

Fitch's Key Assumptions Within Our Rating Case for the Issuer

  • A further 29% yoy drop in uplift volume in 2021 to about 27% of pre-pandemic levels (2020: 38%) followed by a recovery to about 55% of pre-pandemic levels in 2022 and 85% in 2023
  • FPT's transmission volume in 2021 at a similar level to that in 2020, with a 28%-29% fall in jet fuel compensated by rising ground product, supported by the full operation of the second phase of the north pipeline project since September 2021. Transmission volume growth of 30%-32% in 2022 and 22%-24% in 2023, assuming no progress in the pipeline connection project
  • A further decrease in the EBITDA margin to 14%-15% in 2021 (2020: 17.4%), rising to 40% in 2022 and 50%-52% in 2023 amid a recovery in uplift volume
  • Capex of about THB1.1 billion in 2021 and THB250 million-350 million a year in 2022-2023
  • No capex for pipeline connection project. No additional investments assumed in 2022-2023

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 below 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

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, after end-September 2021, THB320 million was rescheduled to 2023, while THB700 million of the amount due is a short-term loan that can be renewed if needed. BAFS' liquidity is 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 at 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. BAFS has a 72%-owned subsidiary that operates the pipeline from fuel depots in Bangkok to both airports and owns the only pipeline to the north of Thailand. The company also owns solar generation projects, with capacity of 36MW in Thailand and 13MW in Japan.

The principal sources of information used in the analysis are described in the Applicable Criteria.

Source: Fitch Ratings