Global Power Synergy Outlook Revised To Stable On Proposed Equity Injection And Deleveraging; 'BBB-' Rating Affirmed

  • Global Power Synergy Public Co. Ltd.'s (GPSC) capital structure will improve with proposed equity funding of Thai baht (THB) 74 billion and debt refinancing at competitive rates.
  • Nevertheless, GPSC remains exposed to increase in fuel prices, risk of delay of renewal in power purchase agreements (PPA) with Electricity Generating Authority of Thailand (EGAT) and ability to realize full synergy benefits.
  • On Sept. 11, 2019, S&P Global Ratings revised its outlook on GPSC to stable from negative. At the same time, we affirmed our 'BBB-' long-term issuer credit rating on the Thailand-based power generator. 
  • The stable outlook reflects our expectation that GPSC will deliver steady operating performance and reduce leverage (ratio of debt to EBITDA) to about 5.0x over the next 12-18 months.
SINGAPORE (S&P Global Ratings)--S&P Global Ratings today took the rating actions listed above. We revised the outlook to stable because we expect GPSC will deleverage, supported by a sizable equity infusion from the wider PTT group, low-cost debt funding, and steady operating performance.
We expect GPSC's debt-to-EBITDA ratio to decrease to about 5.0x sustainably over 2020 and 2021 from pro forma adjusted leverage of 5.2x in 2019 (considering 100% of Glow Energy Public Co. Ltd.'s cash flow in 2019, instead of only cash flow post effective acquisition date of March 14, 2019).
In our view, PTT Group's commitment to infuse THB74 billion equity (up from THB70 billion) and undertaking to subscribe for the minority shareholders' portion of 25% demonstrates the parent's strong support. This increases the likelihood of a successful rights issuance in early October 2019. The proceeds will be used to partially repay the short-term borrowing of THB134 billion to fund the Glow acquisition, maturing on March 14, 2020. We expect the company to receive extraordinary support from PTT group if needed. The parent's credit profile is also strengthening, as reflected by PTT Public Co. Ltd.'s stand-alone credit profile (SACP) of 'bbb+', up from 'bbb' earlier this year.
We believe refinancing risks have subsided after the planned equity infusion and firm commitments from banks for part of the acquisition debt. We expect GPSC to use a mix of cash (THB10 billion), debentures (THB35 billion) and long-term bank loans (THB15 billion) at a cost of debt of about 3.5% and a tenor of three to five years to take out the remaining THB60 billion of acquisition financing.
GPSC is likely to perform steadily over the next two years during the integration of Glow operations. The combined entity's margin profile will improve with greater coal exposure and Glow's higher-margin contracts for small power producers (SPP). We continue to expect steady EBITDA margin of 27%-28% over 2020-2021, on the back of strong earnings profile, stabilizing fuel costs and potential synergy realization.
In our view, there could be some downside risks to earnings over the next 12-24 months if fuel costs remain high (especially for industrial customers) and cost savings stemming from synergy benefits do not materialize. GPSC reported lower-than-projected EBITDA margin in first-half 2019 due to a spike in natural gas and coal costs (up about 10% from previous year). These fuel costs are largely pass-through (about 70%) for industrial users, albeit with a time lag of four months under the fuel tariff adjustment.
Pending renewals of expiring PPAs pose some risks to earnings and cash flow visibility, in our opinion. Although the renewals are staggered, about 20% of GPSC's equity operating capacity are due for renewal by 2024. Majority of these contracts are with industrial customers, which have a high likelihood of renewal, in our view. A portion of these contracts (about 5% of total equity operating capacity) are awaiting acceptance by the state-owned Electricity Generating Authority of Thailand (EGAT) under the SPP Replacement scheme over the next few weeks. We expect the renewals and construction of such SPP plants and offtake to be smooth over the next few years, but any delays would result in lower earnings than estimated for GPSC.
The stable outlook reflects our expectation that GPSC will improve its capital structure, successfully integrate Glow, and contractually manage fuel price costs to deliver steady operating performance. We expect GPSC to reduce its debt-to-EBITDA ratio to about 5.0x in the next 12-18 months.
We would lower the rating if GPSC's capital structure weakens with the debt-to-EBITDA ratio materially exceeding 5.5x. This could happen due to significant erosion in its earnings profile because of poor integration of Glow, greater PPA contract renewal risk, adverse fuel price movements, and higher debt-funded growth investments than we expect.
In a less-likely scenario, elevated distributions to shareholders despite high leverage would add to the rating pressure.
We could also lower the rating if: (1) we believe GPSC's strategic relevance to PTT group has declined, for instance if its status as the group's preferred power supplier seems less entrenched or if PTT Public Co. Ltd. and its subsidiaries' ownership reduces significantly; or (2) we lower our assessment of the SACP of PTT Public to 'bbb-', which we view as unlikely.
We would raise the rating if GPSC demonstrates stronger financial discipline with debt-to-EBITDA ratio improving toward 4.5x on a sustainable basis. This could happen if the company's operating performance strengthens significantly due to improved cost position with a financial commitment to operate at a level below 5.0x ratio of debt-to-EBITDA. We will also need greater visibility on the company's future capital expenditure, funding, and growth plans.
In a remote scenario, we may upgrade GPSC if we assess its relationship with its parent to have strengthened. This could happen if GPSC becomes more strategic and integrated with the PTT group.
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