A local currency hit by months of political unrest, and skittish consumers spending less are keeping the pressure on Thai billionaire Dhanin Chearavanont, who heads Asia's most indebted food retailer.
Dhanin's CP ALL PCL, which operates 7-Eleven convenience stores, last year took a 1-year $5.8 billion loan to fund the $6.6 billion acquisition of cash-and-carry wholesaler Siam Makro - paying 53 times earnings in Asia's most expensive consumer sector deal by multiple.
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At the time, Dhanin promised investors to more than halve CP ALL's leverage - its net debt to EBITDA ratio - to just above 3 times by 2017 from an estimated 8 times, the highest among all food and staples companies in Asia, Thomson Reuters data show.
He hoped to do that by adding 500-600 stores a year, but that expansion is threatened by Thailand's political fragility and an economic slowdown that have seen the value of the Thai baht slide by nearly 14 percent since last April.
The government on Tuesday imposed a state of emergency in Bangkok and surrounding provinces to help contain street protests aimed at forcing Prime Minister Yingluck Shinawatra to resign.
"There would be three risks," said Nirgunan Tiruchelvam, a Singapore-based analyst for Standard Chartered, who rates CP ALL stock as 'underperform'. "One is the depreciation of the currency; second is the roll-out of new stores may not be as aggressive; and finally, whether same-store sales will measure up to the valuation that the company has."
The political crisis affected domestic consumption in the fourth quarter and would likely drag down retailers' profits from the previous quarter, said Mintra Ratayapas, an analyst at KK Trade Securities. "Sentiment in the retail sector has already been hit by weak domestic consumption. In Q4, same-stores sales at Big C and Robinson were negative; the rest faced slower-than-expected growth," she said.
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This could potentially squeeze Dhanin's efforts to trim his debt load, with some bankers saying he may look to raise equity or sell assets into a property fund.
CP ALL shares have fallen more than 11 percent since late last month, but are up by a quarter since hitting 17-month lows last August.
Dhanin was not available to comment, but Kriengchai Boonpoapichart, head of finance and investor relations at CP ALL, said: "We still have great faith in Thailand's future prospects and maintain our target for growth and expansion."
A Drop of Dilution?
Investment bankers say Dhanin may have to dilute his holdings in various companies or sell assets via a property fund. "First thing would be public equity. I don't think their mentality is to hive off anything, but they would look at diluting," said a senior banker, who has a close relationship with Thai corporations.
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Dhanin's flagship Charoen Pokphand Foods sold $290 million of bonds earlier this month that will be exchangeable into CP ALL shares.
A second banker said: "Dhanin isn't keen on equity fundraising while the group still has other options, such as selling some Siam Makro assets into a property fund."
Such a fund could be backed by rental income from 7-Eleven stores or other retail businesses. These listings are popular in Thailand as they provide investors a yield play while offering companies long-term capital. Dhanin's telecom unit, True Corp , sold a $1.8 billion fund in December, packaging fixed assets like telecoms towers and cables.
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The impact of the street protests and economic slowdown on 7-Eleven stores has been mixed. A salesperson at one outlet in central Bangkok told Reuters that sales had halved since protests began in November, but another salesperson at a second store said sales had risen slightly in the past week.
When CP ALL's takeover of Siam Makro was announced last April, the baht was near a 16-year high, prompting Dhanin to keep a third of the dollar loan, some $2 billion, unhedged against any slide in the local currency.
CP ALL sold 50 billion baht ($1.52 billion) bonds in late October, using the proceeds to trim that unhedged portion to around $400 million, or 7 percent of its total debt, banking sources and analysts said.
The group is in talks with banks to replace the outstanding $4.2 billion loan with 40 billion baht ($1.22 billion) of bonds and a longer-term syndicated loan by next month, a banking source told Reuters.
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"Given that the rest of the bridging facilities will end in the middle of the year, we're working on long-term refinancing, which may include another corporate bond issuance and long-term loans from financial institutions," Kriengchai wrote in an emailed response to Reuters questions for this article.
But in the process, Dhanin could take a hit from the baht's slide, losing an estimated $30 million to date from positions related to the Siam Makro acquisition, Reuters calculations show.
In its third-quarter earnings released in November, CP ALL took a 391 million baht foreign exchange loss - a small portion of the paper loss it could incur. "The losses were driven by the unhedged position of approximately $2 billion foreign currency debt used to acquire MAKRO," Macquarie said in a note then. "We deem this unhedged exposure effectively a speculating on currency which is not (a) prudent funding policy."
Dhanin also took on a big dollar loan from UBS to part finance last year's $9.4 billion acquisition of HSBC's stake in Ping An, China's No. 2 insurer - part of a total $27 billion acquisition splurge by Dhanin and Thai beer tycoon Charoen Sirivadhanabhakdi in 2012-13.
Thai credit default swaps trade at 151.5/161.5 basis points, the highest since August, with the cost of insuring $10 million of Thai debt now at around $160,000, about $60,000 more than when street protests began late last year.
"He (Dhanin) paid top dollar, valuation-wise, and top dollar in terms of where the baht was at that time," said the senior banker.
"You're coming off a set of forecasts, or a view of the world that was probably a lot more rosy to be able to justify that valuation, and now you're hit by the reality of what the economy is going to be in 2014."