Fitch downgrades BAFS to 'A', but stable

Fitch downgrades BAFS to 'A', but stable

Fitch Ratings Thailand has downgraded Bangkok Aviation Fuel Services' national long-term rating to A from A+, while maintaining BAFS's outlook as stable.

The agency also affirmed BAFS's national short-term rating at F1.

The downgrade reflects Fitch's expectation that BAFS's financial profile will be weaker than previously expected. Fitch expects BAFS's funds from operations (FFO) adjusted net leverage to remain above 2.5 times over the next 3-4 years.

The higher leverage expectations are driven by likely repeated cost overruns in the north pipeline project and a likely delay in the completion of the second phase of this project being undertaken by its subsidiary, Fuel Pipeline Transportation Ltd (FPT).

Fitch expects BAFS's FFO adjusted net leverage to rise and remain between 3.5 times and 4.5 times in 2019-20 as it predicts further cost overruns in FPT's north pipeline project.

The opening of the second phase is likely to be in mid-2020, a delay of about six months, postponing revenue and cash flows from the project. The first phase started operation in June. Fitch expects BAFS's financial leverage to improve from 2021 and range between 2.5-3.5 times after completion of the FPT project and assuming no other committed investment plans.

BAFS is bidding with a joint-venture partner to operate the aviation fuelling system in the expanded U-tapao airport, which will be the main airport in the Eastern Economic Corridor. If it wins the contract, Fitch estimates BAFS's financial leverage will be marginally higher and closer to 4.5 time in 2019-20 and about 3.5x in 2021.

FPT's new pipeline, the first in northern Thailand, carries off-take risk. The first phase of the project serves part of the fuel transport needs of most major oil companies in Thailand, but no off-take agreement has been signed yet.

Fitch considers the off-take risk to be mitigated by the existing oil demand in the area served and the cost of transport via pipelines being competitive compared with other modes, primarily trucks. The switch to pipelines is also likely to be supported by safety, social and environmental considerations, in Fitch's view.

Fitch expects BAFS's uplift volume (the amount of fuel supplied to aircraft) to increase by 3-3.5% a year over the medium term, slower than 4.5% in 2018. The uplift volume growth in 2019 is likely to be about 2.5%, lower than the 4% previously expected, because of the global economic slowdown and appreciation of the baht, which deterred some tourist arrivals.

These factors are likely to continue in 2020. Uplift volume growth should be mainly supported by increasing long-haul flights by low-cost carriers at Don Mueang airport while the uplift volume at Suvarnabhumi airport is likely to be relatively flat in 2019-20.

The ratings of BAFS reflect its dominant position in Thailand's aviation fuel service market. BAFS is the sole operator of the fuel depot and hydrant network and the major into-plane fuelling service provider with 88% market share at Suvarnabhumi, the country's largest airport.

BAFS is also the sole operator for refuelling services at Don Mueang. The company faces limited competition, and benefits from high barriers to entry as concessions from the airport operator are required to provide aviation fuel services at airports.

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