Sahaviriya Steel Industries Public Company Limited

Transcription

1 Contacts Monthip Pringuthumporn Suchada Pantu Nalin Tungtumniyom Watana Tiranuchit, CFA Addresses N e w s f o r I n v e s t o r s Announcement No December 2007 Sahaviriya Steel Industries Public Company Limited Company Rating: Issue Rating: SSI083A: Bt1,450 million senior secured debentures due 2008 Rating Outlook: BBB BBB Negative Rating History: Company Rating Issue Rating Secured Unsecured 23 Dec 2005 BBB BBB - 30 Aug 2005 BBB - - Rating Rationale TRIS Rating affirms the rating of Sahaviriya Steel Industries PLC (SSI) and the rating of SSI s existing debentures at BBB. The ratings reflect SSI s market position in Thailand as a leading producer of flat steel products, strong relationships with customers of premium grade products, a market protected by quotas and tariffs, and a variable cost structure that enhances production flexibility. These strengths are tempered by high competition from both local and overseas manufacturers, the cyclical nature of the steel industry, short-term customer contracts (one to three months), and limited operating diversity. There are three manufacturers of hot rolled coils (HRC) in Thailand. SSI is the market leader in terms of production and sales volume. Unlike integrated steel mills and mini-mills, SSI does not manufacture steel, the company processes semi-finished steel slabs into flat-rolled coils. SSI owns a single production facility located close to a deep-sea port in Prachuap Khirikhan province. The sea port location was strategically chosen to cut transportation costs for both raw materials and finished steel products. Its domestic clients accounted for 78% of total shipments in the first nine months of The Thai steel industry is somewhat protected by government policies. Local producers benefit from anti-dumping (AD) tariffs ranging from 3.22% to % on products imported from 14 countries. However, local producers are prone to be negatively affected by the influx of low cost steel from countries not subject to antidumping tariffs, particularly China. SSI s operational risk stems from its concentration of operation in a single production facility, which means that any unplanned shutdowns could impact cash flow stability. In addition, the lack of vertical integration and product diversity exposes the company to the volatility of supply and demand for slabs and HRCs in the world market. SSI s business model to stock a broad range of slabs to meet customers needs exposed it to inventory holding risk and a high working capital requirement. SSI s operating performance in the first nine months of 2007 was weaker than expected. Shipments for the first nine months of 2007 were 0.96 million tonnes, down by 31% from the same period last year. The decline was mainly due to sluggish demand in the domestic market and high slab and transportation costs. SSI slashed production to 0.88 million tonnes, compared with 1.25 million tonnes in the same period last year. A cost structure with high variable costs benefits SSI in terms of production flexibility. The company can adjust production schedule to match the market environment. Operating margin before depreciation and amortization in the first nine months of 2007 was 7.10%, improved from 6.31% in the same period of As business slowed, SSI s outstanding debt declined as its loan was used mainly to finance working capital. Outstanding debt declined from Bt30,670 million as of December 2005 to

2 Bt21,960 million as of December 2006 and further to Bt15,659 million as of September The total debt to capitalization ratio and the funds from operations to total debt ratio improved from 52.30% and 4.88% in 2006 to 43.55% and 6.67% (non-annualized) in the first nine months of 2007, respectively. Rating Outlook TRIS Rating maintained the negative outlook for SSI based on the expectation that SSI s financial profile will be under pressure during the next 1-2 years. Though the company s financial performance was weaker than anticipated, its financial profile still warrants the BBB ratings. However, the ratings would be downgraded if there is a material deterioration in the company s financial profile, which might be caused by lower cash flow generation as a result of declining market prices or lost volume. A substantial rise in strategic investments, leading to weaker cash flow protection, will also exert downward rating pressure. Key Rating Considerations Strengths/Opportunities Leading domestic market position Strong relationship with customers of premium grade products Government support through trade barriers Production costs are largely variable Weaknesses/Threats Highly competitive and cyclical industry Lack of long-term sales contracts Limited operating diversity Corporate Overview SSI was established in 1990 by Mr. Wit Viriyaprapaikit, the founder of the Sahaviriya Group, a steel conglomerate in Thailand with an initial investment of Bt13,000 million to manufacture 2.4 million tonnes per year of HRC. SSI is the flagship company of the Sahaviriya Group. As of June 2007, the company was 47.33% owned by the Sahaviriya Group. SSI was the first HRC manufacturer in Thailand with commercial production starting in The company s mill is located on 1,200 rai of land, five kilometers from a deep sea port in Bang Saphan district, Prachuap Khirikhan province. SSI has two subsidiaries: West Coast Engineering Co., Ltd. (WCE) and Prachuab Port Co., Ltd. (PPC). WCE, a wholly-owned subsidiary, provides maintenance and engineering services, mainly to SSI. PPC, held 51% by SSI, operates a deep-sea port to service SSI and other companies located nearby. SSI has also invested in downstream steel companies, owning 8.77% of Thai Cold Rolled Steel Sheet PLC (TCR), and 3.7% of Thai Coated Steel Sheet Co., Ltd. (TCS). TCR manufactures coldrolled coil (CRC), using HRC as a raw material, while TCS manufactures electro-galvanized steel sheet in coils, using CRC as a raw material. SSI faced financial difficulties arising from the 1997 economic crisis. In 1999, the company was forced to enter into a debt restructuring program that comprised debt rescheduling, conversion of debt into equity, and conversion of foreign currency debts into baht denominated loans. Four years later, the company refinanced the restructured debts by issuing Bt4,000 million in secured debentures and executing a new Credit Facility Agreement with lenders. SSI s total debt fell from Bt20,067 million in 2002 to Bt11,311 million in In the first nine months of 2007, SSI had total revenue of Bt20,402 million and earnings before interest, tax, depreciation and amortization (EBITDA) of Bt2,064 million, down from Bt28,005 million and Bt4,067 million in the same period of the prior year. Recent Developments Expanded equity stake in cold-rolled mill SSI s board of directors approved a plan to purchase 42.23% of Thai Cold Rolled Steel Sheet PLC (TCRSS). This acquisition will cost approximately Bt4,700 million funded through 7- year loans from financial institutions. After the acquisition, SSI s stakes in TCRSS will increase to 51% from 8.77% at present. TCRSS is one of the major manufacturers of cold rolled steel sheet in Thailand with a production capacity of 1.2 million tonnes per annum. Its products are sold to various industries, such as automobile, electrical appliances, and construction and coated sheet. TCRSS was established by Sahaviriya Group, but SSI s ownership declined during the financial difficulty to 8.77%. Currently, the two largest shareholders in TCRSS are JFE Steel Corporation (38.42%) and Marubeni Corporation (37.57%). After the acquisition, the shareholding proportion by the three major shareholders will be SSI (51%), JFE (22%), and Marubeni (22%). 2

3 Chart 1: Iron and Steel Making Upstream Products Downstream Products Coal, Coke Slab Hot-rolled Steel Sheet Cold-rolled Steel Sheet, Coated Steel Sheet Raw Material Pig Iron, Sponge Iron Iron Ore, Limestone Billet, Bloom Bar, Wire Rods, Hot-rolled Section Source: TRIS Rating INDUSTRY ANALYSIS The steel industry is cyclical and highly competitive across international boundaries. Steel is generally more cyclical than other industries since steel demand depends not only on the general economic climate but also on the strength of other cyclical industries. In Thailand, the major steel consuming industry is construction, which utilizes more than 50% of all steel produced in the country. Other steelconsuming industries are automobiles, industrial machines, and electrical appliances. In the first half of 2007, the steel industry slowed as construction and domestic automobile sales retarded. TRIS Rating expects a newly-elected government will not be able to push forward on any mega projects until at least the second half of The mega projects will help drive a rebound in construction investment. Steel production limited to semi-finished and finished products There are no producers of upstream steel products (Chart 1) in Thailand due to the small size of the domestic market. Upstream steel producers do not find it economical to invest as the industry is highly capital intensive. Steel industry products can be classified into semifinished and finished steel products. Semifinished steel products are used primarily as the raw materials of finished steel producers. Presently, domestic production of semi-finished steel products, including slab, bloom, and billet, is not sufficient to meet domestic demand. Imported semi-finished steel products mainly came from Russia, China, and Ukraine. Finished steel products are used mainly in the construction, automobile, and furniture manufacturing industries. The consumption of hot-rolled steel sheet, a downstream segment of the steel industry, decreased by 11% in 2006 to 7.22 million tonnes, owning to a slowdown in domestic automobile consumption by less construction activity. Hot-rolled steel sheet production decreased by 6.6% in 2006 to 4.13 million tonnes. As domestic production fills just about half of the country s demand, the balance was imported, mainly from Japan. There are three large hotrolled coil producers in Thailnad: SSI, with a 46% share of total hot-rolled steel production capacity, G Steel PLC (G Steel) (20%) and Nakornthai Strip Mill PLC (NSM) (17%). There are two hotrolled plate producers: Sahaviriya Plate Mill Co., Ltd. (11%) and LPN Steel Plate Co., Ltd. (6%). Chart 2: Hot-rolled Steel Sheet Production and Consumption 3 metric tons Production Consumption Source: Iron and Steel Institute of Thailand Few new infrastructure projects will cut steel consumption over the medium term The construction industry generally moves with the economy and is sensitive to investor confidence. Construction investment in 2006 made up 32% of the total investment value for Thailand. Government spending on infrastructure plays a major role. As investor and consumer confidence started reducing in 2006, the residential property market faded. Political uncertainty meant that new infrastructure projects were postponed as well. Total construction growth declined to 4.8% in 2006, and to 2.15% in the first half of The slowdown in construction led to a drop in production and sales of hot-rolled sheet. The production of hot-rolled steel sheet declined 5.98% to 2.1 million tonnes in the first half of

4 2007. The new Cabinet approved six electric train construction projects worth approximately Bt160 billion in February Two of these projects are expected to enter the bidding process in the next few months. Nevertheless, the projects are not expected to start before the second half of Moreover, the project details, including the total budget and the construction period, might be changed by the new government that takes office after 23 December 2007 election. Automobile production slumps The automobile industry in Thailand has been an important industry for more than a decade. At the present, there are 13 automobile assemblers in Thailand, with total production capacity of over 1.5 million cars per year. The growth rate for auto production has slowed since 2006, dropping from an average growth rate of over 20% per annum between 2002 and The production growth rate over the first nine months of 2007 was 3.7%, down from 5.6% in A drop in domestic car sales is believed to be major reason for the diminished growth. However, automobile producers are now exporting more areas. The proportion of vehicles exported increased from 39.2% of production in 2005 to 45.4% in Therefore, automobile production is believed to hold further growth, consistent with the prospects of export markets. Steel prices rising The price of steel increased significantly in According to a steel industry consultant, MEPS (International) Ltd., the average world price for hot-rolled coil rose to US$603 per tonne in August 2007, up from US$559 per tonne in The price increase is the result of the higher prices for iron ore, coal, and freight. Steel exported from China currently accounts about 20% of world steel export. However, in 2007, China eliminated the export tax rebate for most steel products, imposed an export tax between 5%-10%, and now requires domestic producers to secure an export license. These policies aim to discourage exports of steel products. Consequently, the export of Chinese steel in the world market is expected to fell in the near future. The price of steel in Thailand has also risen, but to a lesser extent, as the price is controlled by the Ministry of Commerce (MOC). Though the MOC abolished the ceiling price for steel sheets in March 2004, any steel trading company which wants to raise the steel price must submit the proposed price to the Department of Internal Trade (DIT) not less than seven days before it becomes effective. Moreover, the DIT has placed steel sections, which include plate and wire, on the list of controlled products. The DIT monitors daily the price and market situation for controlled products. In addition, every month since November 2004, the DIT has announced the recommended price for steel sheets. Steel prices will reflect not only changes in the price of major raw materials, i.e. hot-rolled and cold-rolled steel sheets, but also changes in the costs of scrap and slab. The recommended price in October 2007 for hot-rolled coil and hot-rolled plate were Bt25-Bt25.5 per kg. and Bt26-Bt27 per kg., respectively. Chart 3: World Steel Price 4 us$/ton Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Hot Rolled Coil Hot Rolled Plate Cold Rolled Coil Jan-05 Source: MEPS (International) Ltd. Anti-dumping tariffs benefit local HRC producers In 2003, Thailand implemented AD tariffs. The tariffs range from 3.45% to % of the C.I.F. price for hot-rolled steel sheet in coils and not in coils, and cover steel originating from 14 countries. The tariffs cover five years from May 2003 to May 2008, with an exemption for hotrolled steel sheet imported solely for re-export. However, on 20 March 2004, the duties on hotrolled coil and plate were temporarily suspended for six months in response to a shortage of domestic hot-rolled steel sheets. Thailand reduced the AD tariff rate for JFE Steel Corporation from 36.25% to 3.22% in October 2005 and cancelled the AD tariff rate for Nippon Steel Corporation in July The current import tariffs for iron and steel products range between 1% to 5% of the C.I.F. price. Moreover, The Japan-Thailand Economic Partnership Agreement (JTEPA), in effect since 1 November 2007, will eliminate import tariffs for iron and steel products from Japan in the eleventh year. Thailand still maintains import quotas for iron and steel products which cannot be produced in Thailand. Iron and steel products imported within the quota will not be charged. The Foreign Trade Department has set a quota of 950,000 tonnes Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

5 of hot-rolled steel to be imported from Japan between November 2007 and the end of The quota will be reviewed annually. Table 1: Hot-rolled Steel Anti-dumping Tariffs Country of Origin Anti-dumping Tariff (% of C.I.F. Price) Japan 3.22* South Africa Russia Kazakhstan India Korea Taiwan Venezuela Argentina Ukraine Algeria Indonesia Slovakia Romania Source: Ministry of Foreign Affairs * AD rate for JFE Corporation BUSINESS ANALYSIS Maintain leading position in a smaller domestic market SSI offers two grades of HRC products: commercial grade and premium grade. Commercial grade products are sold mainly to the construction industry in Thai baht under onemonth contracts, while premium grade products are sold under 3-month contracts to cold rolled mills, automobile and electrical appliance manufacturers. There are three HRC manufacturers in Thailand: SSI, G Steel and NSM. SSI is the largest HRC producer in Thailand with a production capacity of four million tonnes per year. SSI also has the largest market share. Its domestic market share in 2006 was 27.18%, up slightly from 25.76% in SSI sold 1.34 million tonnes in the domestic market, up from 1.27 million tonnes in However, due to slowdowns of both public and private construction as well as high slab costs compared with HRC prices in 2007, the company cut back production and sales. For the first nine months of 2007, production utilization was only 29%, compared with 42% in the same period of last year. Shipments also dropped to only 0.96 million tonnes, compared with 1.39 million tonnes in the first nine months of The decline was mainly due to drops in commercial grade HRC and exports, which contracted by 33.46% and 32.37%, respectively. Chart 4: SSI s Production and Sales Volume Unit : Mil. MT Source: SSI Production Sale M2007 The company s strategy is to shift to more premium grade products as these products offer higher margins and more stable demand than commercial grade products. Shipments of premium grade products in the first nine months of 2007 were 0.31 million tonnes, accounting for 53.71% of total shipments. However, they declined from 0.41 million tonnes in the same period of the prior year. Table 2: SSI s Sales Breakdown by Product Category Unit: % /2007 Premium grade Commercial grade Export Source: SSI FX risk partially mitigated by price mechanism Unlike integrated steel mills and mini-mills, SSI does not manufacture steel; the company processes flat rolled steel sheet, primarily from imported semi-finished steel slab. Prices of slab are quoted in US dollars. Though domestic HRC selling prices are quoted in Thai baht, prices are linked to US dollar prices in the international market. The foreign exchange risk from imported slabs is partly mitigated by a natural hedge from exports and US dollar-linked sales to cold rolled mills. The remaining exposure is partly hedged through forward contracts. Business strategy raises market risk exposure SSI tries to compete with imported HRC in terms of customer satisfaction, including 5

6 technical assistance, product customization, production lead times, delivery times, and quality. As a result, the company has to carry various slab specifications to meet customers requirements. Slab inventory and HRC inventory are targeted to be maintained at 120 days and 45 days, respectively. The strategy to hold a large amount of slab inventory exposes SSI to inventory holding risk. The risk arises as there is a mismatch between slab purchasing costs and HRC selling prices or slow moving of sales. The risk is exacerbated when steel prices are exceptionally volatile, as happened in During that time, SSI had an overhang of slab inventory that it purchased at high prices. Meanwhile, HRC prices tumbled in the second half of 2005 and remained low until the first quarter of Sales concentrated in top 10 customers The company s products are sold to a variety of industries. However, about 65% of total sales volume in 2006 went to the top 10 customers; shipments to three cold-rolled mills accounted for 22% of sales volume. Companies in the Sahaviriya Group are major customers, accounting for 41% of total revenue in 2006, up from 34% in The largest customer in the Sahaviriya Group is BS Metal Co., Ltd., a steel trader and steel pipe manufacturer. BS Metal bought almost 50% of SSI s commercial grade HRC sold in High raw material costs and currency appreciation weaken competitive position SSI benefits from cost structure where fixed costs constitute only 5% of production costs. The high proportion of variable costs benefits SSI in terms of production flexibility. The company can adjust production during unfavorable industry conditions. The average cost structure during was 83% slab and 17% conversion costs. However, the continued rise in slab costs during the past few years drove the proportion to 85% slab and 15% conversion costs. Since slab costs make up-higher proportion of total cost, SSI s competitive position has weakened compared to imported commercial grade HRC. In addition, as conversion costs are incurred in local currency, the stronger appreciation of the Thai baht against the US dollar compared with other currencies has raised its per unit of conversion cost in US dollars, higher relatively to HRC producers in many countries. TCRSS investment enhances business profile, but hurts financial profile in short term SSI agreed to acquire an additional 42.23% interest in TCRSS, a cold rolled steel sheet manufacturer, from two major shareholders and minority shareholders. The acquisition cost was approximately Bt4,700 million, which will be funded by 7-year loans from financial institutions. The acquisition process is expected to be completed in early Upon completion, SSI s interest in TCRSS will increase from 8.77% at present to 51%. TCRSS is a major cold rolled steel sheet producer in Thailand with a total production capacity of 1.2 million tonnes per year. In 2006, TCRSS had revenues of Bt15,640 million and EBITDA of Bt1,642 million. The acquisition is part of a vertically integrated flat steel producer of the group. The acquisition would enhance SSI s business profile, strengthening its position in premium grade products supplied to TCRSS and inventory management. In the first nine months of 2007, SSI shipped 0.10 million tonnes of premium grade HRC to TCRSS, compared with 0.11 million tonnes in the same period last year. SSI expects to gradually increase sales volume to TCRSS to be in line with its ownership in TCRSS. Iron smelting project worth Bt490,000 million To fully assess the status of SSI, it is necessary to look at the Sahaviriya Group s strategy, as SSI is the group flagship. In 2005 Sahaviriya Group announced a plan to build a blast furnace worth Bt490,000 million. The first phase of the project involves a capacity of five million tonnes at a cost of Bt90,200 million. The investment will be financed with Bt30,000 million in equity and Bt60,000 million in debt. The group is currently in the process of seeking Board of Investment (BoI) investment privileges and approval of the environmental impact assessment (EIA). Approvals are expected in the beginning of Financing will come after the approvals. First-phase construction is expected to start in the middle of The project will be located at the Group s steel complex in Prachuap Khiri Khan s Bang Saphan district, near the deepsea port. The strategic location cuts transportation costs for raw materials and finished goods. The project is expected to benefit SSI in terms of raw material availability and price 6

7 stability. It is not certain which companies in the group will invest in this mega project. However, there is high possibility that SSI will be one of the shareholders. online in SSI s margins are expected to be under pressure during next year as rising costs cannot easily be passed through to customers when demand is slipping. FINANCIAL ANALYSIS SSI s revenue and cash flow are volatile as the steel industry is cyclical. Operating performance hinges on the spread between HRC selling prices and slab costs. Sales down due to sluggish domestic demand Shipments in the first nine months of 2007 fell to 0.96 million tonnes, down by 31% from the same period of the prior year. The volume slumped due to sluggish domestic demand in the construction market and a competitive export market. Shipments of commercial grade HRC declined by 33.4% to 0.45 million tonnes in the first nine months of Operating margin up but below expectation SSI s operating margin before depreciation and amortization in the first nine months of 2007 was 7.10%, up from 6.31% of the same period of the prior year. However, the margin was still lower than TRIS Rating s expectation. The average HRC selling price in US dollar for the first nine months of 2007 has increased to US$590-US$600, compared with US$510- US$520 in the same period of the prior year. However, this rise lagged the rise in slab prices. In addition, while the metal spread (the difference between HRC selling price and slab cost) has climbed back to the prior levels, per unit of conversion cost substantially increased in both local currency and US dollar terms. The rise in conversion costs was due to higher slab costs, energy costs, and currency appreciation. Conversion cost per tonne increased from US$40 in 2004 to US$56 in 2005, US$67 in 2006, and US$69 in the first nine months of SSI s strategy to deal with weak margin was to improve production efficiency and shift to premium grade products for the automobile industry. However, it has taken more time than management anticipated to be on the list of approved automotive industry suppliers. Shipments of premium grade to cold rolled mills in the first nine months of 2007 were lower than expected. TRIS Rating expects slab costs will remain high through 2008 due to a cost push. Slab producers are facing higher material costs (iron ore and coking coal) and energy costs. However, Debt currently used to finance working capital SSI s outstanding debt is driven by business volume, steel prices and working capital requirement. The company s business model drives the demand for working capital. The larger the sales volume, the greater the inventory requirement for slab and the higher the working capital requirement. In addition, the strategy to increase export sales to mitigate sluggish domestic demand will lead to a greater working capital requirement as the lead times for export shipments are longer than the lead times for domestic shipments. As a result, HRC inventory increased from 1.5 months to 2 months or longer. As of September 2007, SSI had outstanding loans of Bt15,659 million, down by 29% from Bt21,960 million as of December The decline was mainly due to less inventory as a result of the business slowdown. Inventory on hand dropped from Bt24,610 million in 2005 to Bt12,185 million as of September Interest expenses for the first nine months of 2007 dropped to Bt882 million, compared with Bt1,270 million in the same period of the prior year. The total debt to capitalization ratio was 43.55%, an improvement from 52.30% as of December TRIS Rating expects that working capital will increase in SSI will need to rebuild its slab inventory, unless the market is worse than anticipated or the company can reduce the balance of trade receivables. Apart from the working capital investment, the balance of outstanding loans is expected to increase by approximately Bt4,500 million due to the debtfund acquisition of TCRSS. This investment is expected to be exercised in the first half of Weak cash flow protection As a consequence of weaker operating margins and lower business volume, SSI s funds from operations (FFO) declined to Bt1,044 million in the first nine months of 2007, compared with the level of about Bt4,000- Bt6,000 million during business upturns ( ). In the first nine months of 2007, the FFO to total debt ratio was 6.67% (non-annualized). Also, the impaired operating margins cut the EBITDA interest coverage ratio to 2.34 times, from 3.03 times in slab prices may slide as new slab capacity comes Sahaviriya Steel Industries PLC 7 13 December 2007

8 Financial Statistics and Key Financial Ratios* Unit: Bt million Year Ended 31 December / Sales 20,402 35,207 36,012 36,631 29,326 Gross interest expense Net income from operations ,663 2, (1,536) 401 5, ,403 Funds from operations (FFO) 1,044 1,072 1,884 6,197 4,211 Total assets Total debt 36,426 15,659 44,622 21,960 51,316 30,670 36,526 12,278 29,302 11,331 Shareholders equity 20,295 20,026 17,610 20,087 16,410 Operating income before depre. and amort. as % of sales Pretax return on permanent capital (%) 4.22 ** 4.96 (0.82) Earnings before interest, tax, depre. and amort. (EBITDA) interest coverage (times) FFO/total debt (%) 6.67 ** Total debt/capitalization (%) * Consolidated financial statement ** Non-annualized Rating Symbols and Definitions TRIS Rating uses eight letter rating symbols for announcing medium- and long-term credit ratings. The ratings range from AAA, the highest rating, to D, the lowest rating. The medium- and long-term debt instrument covers the period of time from one year up. The definitions are: AAA AA A BBB BB B C The highest rating, indicating a company or a debt instrument with smallest degree of credit risk. The company has extremely strong capacity to pay interest and repay principal on time, and is unlikely to be affected by adverse changes in business, economic or other external conditions. The rating indicates a company or a debt instrument with a very low degree of credit risk. The company has very strong capacity to pay interest and repay principal on time, but is somewhat more susceptible to the adverse changes in business, economic, or other external conditions than AAA rating. The rating indicates a company or a debt instrument with a low credit risk. The company has strong capacity to pay interest and repay principal on time, but is more susceptible to adverse changes in business, economic or other external conditions than debt in higher-rated categories. The rating indicates a company or a debt instrument with moderate credit risk. The company has adequate capacity to pay interest and repay principal on time, but is more vulnerable to adverse changes in business, economic or other external conditions and is more likely to have a weakened capacity to pay interest and repay principal than debt in higher-rated categories. The rating indicates a company or a debt instrument with a high credit risk. The company has less than moderate capacity to pay interest and repay principal on time, and can be significantly affected by adverse changes in business, economic or other external conditions, leading to inadequate capacity to pay interest and repay principal. The rating indicates a company or a debt instrument with a very high credit risk. The company has low capacity to pay interest and repay principal on time. Adverse changes in business, economic or other external conditions could lead to inability or unwillingness to pay interest and repay principal. The rating indicates a company or a debt instrument with the highest risk of default. The company has a significant inability to pay interest and repay principal on time, and is dependent upon favourable business, economic or other external conditions to meet its obligations. D The rating for a company or a debt instrument for which payment is in default. The ratings from AA to C may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within a rating category. TRIS Rating s short-term ratings focus entirely on the likelihood of default and do not focus on recovery in the event of default. Each of TRIS Rating s short-term debt instrument covers the period of not more than one year.the symbols and definitions for short-term ratings are as follows: T1 Issuer has strong market position, wide margin of financial protection, appropriate liquidity and other measures of superior investor protection. Issuer designated with a + has a higher degree of these protections. T2 Issuer has secure market position, sound financial fundamentals and satisfactory ability to repay short-term obligations. T3 Issuer has acceptable capacity for meeting its short-term obligations. T4 Issuer has weak capacity for meeting its short-term obligations. D The rating for an issuer for which payment is in default. All ratings assigned by TRIS Rating are local currency ratings; they reflect the Thai Issuers ability to service their debt obligations, excluding the risk of convertibility of the Thai baht payments into foreign currencies. TRIS Rating also assigns a Rating Outlook that reflects the potential direction of a credit rating over the medium to long term. In formulating the outlook, TRIS Rating will consider the prospects for the rated company s industry, as well as business conditions that might have an impact on its fundamental creditworthiness. The rating outlook will be announced in conjunction with the credit rating. In all cases, the outlook assigned to a company will apply to all debt obligations issued by the company. The categories for Rating Outlook are as follows: Positive The rating may be raised. Stable The rating is not likely to change. Negative The rating may be lowered. Developing The rating may be raised, lowered or remain unchanged. For subscription information, contact TRIS Rating Co., Ltd., Office of the President, Tel: ext 500 Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand, Copyright 2007, TRIS Rating Co., Ltd. All rights reserved. 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