Fitch ratings gives Property Perfect bonds a 'BBB+(tha)'

Proceeds from the debentures will be used for project development and working capital.

The debentures are secured by freehold land with an average appraisal value of Bt884 million, representing a value-to-loan ratio of 170 per cent. Property Perfect must maintain a ratio of at least 160 per cent under the debentures covenant.

The debentures are partially guaranteed by Siam City Bank with an amount of Bt260 million, or 50 per cent of the principal.

Fitch said the rating reflected Property Perfect's strong brand recognition and long track record in Bangkok's prime residential market. It also reflects the company's improving financial position and earnings performance in recent years, although its financial leverage is likely to weaken over the next few years due to more land acquisition and project developments.

Property Perfect's rating takes into account the credit enhancement from a partial guarantee. According to Fitch's rating methodology, a partial-credit guarantee helps to reduce the severity of loss in the event of default.

Considering the estimated amount of recovery based on the Bt260-million partial guarantee, the ratings of the issuer and guarantor and their correlation, Fitch has assigned a two-notch uplift from Property Perfect's senior secured debentures. Bondholders can expect to receive payment of principal and interest firstly from Property Perfect. In the event Property Perfect fails to meet payments, the bondholders should receive payment of principal and interest from Siam City Bank in a lump sum of Bt260 million upon acceleration of payment.

Investors should note the guarantee provides that Siam City Bank will have subrogation rights against Property Perfect once it has paid out any amount in connection with the guarantee and that the bank's claim will be competing with all other unsecured debt of Property Perfect. While this could result in a lower recovery rate for bondholders (in case the value of the pledged land is below the remaining liability of the debentures), the higher value-to-loan ratio as a result of the lower remaining liability should mitigate this risk.

Fitch Ratings said its rating was constrained by the highly cyclical nature of the property industry. Given the economic recession and local political instability, leading to low consumer confidence, housing demand is likely to weaken for the next 12 to 18 months. The competition is expected to intensify, but probably only among large developers, as most of the smaller ones are facing difficulties in seeking finance from banks. The government's real-estate stimulus measures, a slower increase in new supply and the downward interest trend may help to boost declining sales.

The rating also reflects the non-recurring nature of project earnings and the unmatched timing of operating cash flows. This has led to Property Perfect's high working-capital requirement and weak financial leverage during a period of project expansion or cyclical downturn.

Fitch said the stable outlook reflected its expectations Property Perfect's strong brand recognition and long experience in the industry should help to maintain its market competitiveness and financial position consistent with the current rating level over the medium-term. A significant improvement in its earnings performance and sustainable reduction in financial leverage would positively affect the rating, while a prolonged industry downturn and weaker-than-expected financial leverage and liquidity position could negatively affect the rating.