Thai property sector may see a downgrade
THAILAND’S property sector could face a credit rating downgrade resulting from slower economic growth denting corporate earnings and weakening financial conditions, says an institutional investor.
Two companies operating outside the real estate segment were downgraded last month by Tris Rating because of reduced financial status, legal disputes and production oversupply.
The corporate credit rating and unsubordinated debentures without collateral of DTAC TriNet, a subsidiary of Total Access Communication Plc (DTAC), was downgraded to AA from AA+ with a stable outlook based on a group rating methodology, whereby an important subsidiary’s credit rating is altered depending on the parent company’s credit rating.
The downgrade reflects DTAC’s worsening financial profile, following the impending substantial settlement payment of 9.5 billion baht ($303.514 million) to resolve legal disputes with CAT Telecom Plc, plus a huge payment for the two new spectrum licences it acquired last year, according to Tris Rating.
Tris also downgraded Betagro Plc to A- from A on a rationale of an oversupply problem in the livestock industry and the company’s worsening financial profile.
“As we know, the economy is projected to slowdown this year, and this could affect corporate earnings performance,” said the investor, who spoke on condition of anonymity. “If the financial status of companies designated with the BBB credit rating weakens, the rating could plunge to lower investment grade [junk bonds]. This will affect bond yield return and funds that have a policy to invest in investmentgrade bonds.”
In-house rating analysts
There are concerns over whether credit rating agencies conduct thorough monitoring of their rating assessment for high-risk sectors such as real estate, the investor said.
Most institutional investors have in-house rating analysts to assess corporate profiles, giving them better screening of secured corporate bonds compared with individual and high-net-worth investors, the investor said.
“Basically, credit rating agencies are on the issuers’ side, so investors should have their own in-house rating to monitor [corporate credit ratings] along with those assessed by credit rating agencies,” the investor said.
The property sector remains strong, but close monitoring will be required of certain areas such as condominium developers, said Tris Corporation president Waitune Pokachaipat.
Rating activities last year resulted in eight upgrades and 13 downgrades, including one default, according to Tris Rating. The ratio of downgrades to upgrades was 1.63, up from 1.00 in 2017.
Areeya Property Plc and Charn Issara Development Plc were two homebuilders and real estate developers that received a downgrade in credit ratings.
Many property developers, notably SET-listed Pace Development Corporation Plc, opted to use short-term debt instruments in the capital market to fund long-term investments. The practice is viewed by some as a mismatch in terms of funding and repaying debt.
Securities and Exchange Commission (SEC) assistant secretary-general Charuphan Intararoong said the agency has adopted a regulatory standard based on that of the International Organisation of Securities Commissions to supervise credit rating agencies in the country.
The regulator amended the standard last year and informed Tris Rating and Fitch Ratings Thailand of the move, Charuphan said.
The two credit rating agencies are in the self-assessment process to adjust to the new regulatory standard, she said, adding that the SEC will examine their operations soon.
The SEC also conducts offsite monitoring of credit rating agencies, Charuphan said.
Since the 2008 financial crisis was related to risk misrepresentation by credit rating agencies, the SEC wants to inform investors that information provided by these agencies is initial data for investment decision-making, she said.