Darana Chudasri

Swap of 840 million TPI shares for debt

Shareholders of Thai Petrochemical Industries and TPI Polene have approved plans to raise new capital and restructure outstanding debt.
Prachai Leoparaitana, TPI's chief executive, said the company could now raise up to US$1.2 billion in new capital to help repay creditors.

TPI, with debt of $3.4 billion, is the country's largest non-performing debtor. Restructuring talks have dragged on for more than two years. The plan calls for creditors to accept 840 million shares in TPI as payment for $360 million in debt. This would give local and foreign banks a 30% holding in TPI, which has capital of 20 billion baht.
Creditors will be asked to accept a haircut on their outstanding loans of $400-600 million. Mr Prachai said the extent to which creditors were willing to accept a loss would affect the amount of new capital required. A haircut of $400 million would see the company raise $1.2 billion in new capital, while a cut of $600 million would reduce new capital needs to $1 billion.

Creditors have indicated they want to take only a $400 million cut, although a formal decision is expected this week. TPI's financial advisers Jardine Fleming Thanakom and Merrill Lynch Phatra have said creditors could benefit from the larger write-down as fewer new shares would have to be issued, reducing the dilution in value on their own holdings after the debt-to-equity swap. Issuing two billion new shares would reduce creditors' holdings to 15%. Mr Prachai said the final target was for TPI to reduce its debt to $1.5 billion. The company's debt-to-equity ratio after restructuring would fall from 2.6 times at the end of 1999 to 0.36 at the end of this year, putting the industrial conglomerate into "investment grade", he said. TPI Polene shareholders approved the issue of new shares to raise $180 to $270 million in new capital.

Funds would be used to buy back existing debt from creditors at a discount of up to 40%. Under the plan, TPI Polene's long-term debt would fall to 32.5 billion baht by the end of the year from 44.3 billion now, and to 14.2 billion by 2004. Some $90 million in new capital would be reserved for funding of the company's fourth cement production line. Shares of TPI Polene closed at 17 baht on the SET yesterday, unchanged, while shares of TPI also closed at 17, down 0.50 baht.

As an advisor to TPI shareholders, how would you evaluate this restructuring? What alternatives might you recommend?

Thai Petrochemical Industry Public Company Limited operates under three industries; petrochemical industry, energy industry and construction industry. Under the petrochemical industry, the company produces and distributes petrochemical products including various kinds of plastic resins. The energy industry produces raw materials and electricity to the company's group and various kinds of petroleum products. The construction industry produces and distributes construction materials such as cement and steel. The company is also involved in industrial estate, utilities services and educational institutions.

Thai Petrochemical Industry PCL operates in the Diversified Construction Cos. sub-industry, which is a subsector of the Construction industry. This analysis compares Thai Petrochemical Industry PCL with three other companies in the same sub industry in Australasia: Daisue Construction Co., Ltd. of Japan (1998 sales of 134.69 billion Japanese Yen [US$1.21 billion] of which 76% was Building Construction Works), Mitsubishi Construction Co., Ltd. of Japan (137.68 billion Japanese Yen [US$1.24 billion] of which 97% was Building Construction/Civil Engineering), and Arai-Gumi, Ltd. which is also based in Japan (146.61 billion Japanese Yen [US$1.32 billion] of which 98% was Construction Works).

During the first quarter of 1999, sales at Thai Petrochemical Industry PCL totalled 11.54 billion Thai Bahts.

Thai Petrochemical Industry PCL reported sales of 46.17 billion Thai Bahts (US$1.28 billion) for the year ending December of 1998. This represents an increase of 65.6% versus 1997, when the company's sales were 27.89 billion Thai Bahts.

While the company's sales increased significantly, 65.6% in 1998, all three comparable companies experienced a decline in sales (between 13.5% and 20.0%).

During the 12 months ending 9/30/99, the company has experienced losses totalling 6.40 Thai Bahts per share. These 12 month earnings are lower than the earnings per share achieved during the last fiscal year of the company, which ended in December of 1998, when the company reported earnings of 11.39 per share.

This company is currently trading at 0.72 times sales. This is at a higher ratio than all three comparable companies, which are trading between 0.04 and 0.10 times sales. Thai Petrochemical Industry PCL is trading at 0.70 times book value. Since the price to book ratio is less than 1, this means that theoretically, the net value of the assets is greater than the value of a company as a going concern.

The market capitalization of this company is 33.15 billion Thai Bahts (US$919.58 million) .

This company has paid no dividends during the last 12 months. The company also reported losses during the previous 12 months. Thai Petrochemical Industry PCL last paid a dividend during fiscal year 1996, when it paid dividends of 2.02 per share.

On the 46.17 billion Thai Bahts in sales reported by the company in 1998, the cost of goods sold totalled 32.86 billion Thai Bahts, or 71.2% of sales (i.e., the gross profit was 28.8% of sales). This gross profit margin is lower than the company achieved in 1997, when cost of goods sold totalled 65.9% of sales.

Thai Petrochemical Industry PCL's 1998 gross profit margin of 28.8% was better than all three comparable companies (which had gross profits in 1998 between 4.8% and 8.3% of sales).

The company's earnings before interest, taxes, depreciation and amorization (EBITDA) were 5.82 billion Thai Bahts, or 12.6% of sales. This EBITDA margin is better than the company achieved in 1997, when the EBITDA margin was equal to 10.5% of sales. The three comparable companies had EBITDA margins that were all less (between -1.2% and 2.8%) than that achieved by Thai Petrochemical Industry PCL.

In 1998, earnings before extraordinary items at Thai Petrochemical Industry PCL were 22.21 billion Thai Bahts, or 48.1% of sales. This profit margin is an improvement over the level the company achieved in 1997, when the profit margin was -54.4% of sales.

The company's return on equity in 1998 was 74.6%. This was significantly better than the -41.4% return the company achieved in 1997. (Extraordinary items have been excluded).

During the first quarter of 1999, Thai Petrochemical Industry PCL reported a loss per share of 1.83 Thai Bahts.

As of December 1998, the company's inventory was 7.62 billion Thai Bahts. Since the cost of goods sold was 32.86 billion Thai Bahts for the year, the company had 85 days of inventory on hand (another way to look at this is to say that the company turned over its inventory 4.3 times per year). In terms of inventory turnover, this is a significant improvement over December 1997, when the company's inventory was 7.50 billion Thai Bahts, equivalent to 149 days in inventory.

At the end of 1998, Thai Petrochemical Industry PCL had negative working capital, as current liabilities were 69.00 billion Thai Bahts while total current assets were only 21.53 billion Thai Bahts. The fact that the company has negative working capital could indicate that the company will have problems in expanding. However, negative working capital in and of itself is not necessarily bad, and could indicate that the company is very efficient at turning over inventory, or that the company has large financial subsidiaries.

 As of December 1998, the company's long term debt was 59.84 billion Thai Bahts and total liabilities (i.e., all monies owed) were 129.54 billion Thai Bahts. The long term debt to equity ratio of the company is 1.27. This is significantly lower than the long term debt to equity ratio as of in December 1997, when the long term debt to equity ratio stood at 2.85.

As of December 1998, the accounts receivable for the company were 3.88 billion Thai Bahts, which is equivalent to 31 days of sales. This is an improvement over the end of 1997, when Thai Petrochemical Industry PCL had 58 days of sales in accounts receivable.

The 31 days of accounts receivable at Thai Petrochemical Industry PCL are lower than all three comparable companies: Daisue Construction Co., Ltd. had 250 days, Mitsubishi Construction Co., Ltd. had 135 days, while Arai-Gumi, Ltd. had 130 days outstanding at the end of the fiscal year 1998.

Thailand's construction sector has been decimated by the massive oversupply of residential and commercial projects. The floating of the baht in 1997 brought about a huge amount of currency exchange losses to many domestic companies. Thailand's property developers severely overestimated demand. Non-performing loans caused by this sector led to the demise of many banks and finance companies, which lent foolishly without proper scrutiny of project viability or borrowers' repayment capacity. Many developers experienced cash flow shortages and couldn't repay their debts. This plunged the banks into a crisis. Non-performing loans in the banking sector are estimated at nearly 50%. Due to the tremendous amount of non-performing loans, banks have had to restrain their lending to the real estate and construction sectors. The developers, due to a lack of funds, were unable to complete their existing projects. As a result, new commercial and residential projects have virtually been shelved and scores of partially-finished projects dot Thailand's urban landscape.

The prospects for recovery in this sector in the short term are dim. Many experts expect the construction sector will still be in dilemma for years to come due to the tremendous oversupply of residential and commercial office projects. One report shows 260,000 housing unitsremain unsold and unoccupied. Developers are not only challenged by a lack of liquidity, but also by rising construction costs and lower residential and commercial prices as well.
 

Key Ratios and Comparisons

(A): ALL ITEMS ADJUSTED FOR STOCK SPLITS OR DIVIDENDS - 6:5 RIGHTS ISSUE (11.35% DIV) IN 97, 5:4 RIGHTS ISSUE (17.33% DIV) IN 96

 (B): INCLUDES OR EXCLUDES EXTRAORDINARY CHARGE OR CREDIT - EXCLS $29.74 CHG IN 1997

 (C): INCLUDES THE EFFECTS OF A CHANGE IN ACCOUNTING POLICIES OR TAX LAWS - ADOPTED A.S. 30 MANAGED FLOAT SYSTEM IN 1997, EARNINGS IMPACT NOT SPECIFIED

 (D): BASED ON AVERAGE SHARES OUTSTANDING

 (E): DIVIDENDS PER SHARE ESTIMATED USING TOTAL CASH DIVIDENDS DIVIDED BY THE NUMBER OF SHARES OUTSTANDING AT YEAR END