S&P downgrades Vinacomin to ‘B'

"We downgraded Vinacomin because the company's cash flow adequacy and EBITDA interest coverage over the next 12 months are likely to be weaker than we had previously expected," S&P said in the press release. - Photo Trong Dat

The outlook is stable.

The global rating agency also reduced the long-term ASEAN regional scale rating on the Viet Nam-based coal and power producer, better known as Vinacomin, from ‘axBB' to ‘axBB-'.

According to S&P's ratings system, AAA is the highest on the investment grade scale, while the non-investment (speculative) grade starts from BB+. ‘B' is deemed highly speculative.

"We downgraded Vinacomin because the company's cash flow adequacy and EBITDA interest coverage over the next 12 months are likely to be weaker than we had previously expected," S&P said in the press release.

Earnings before interest, taxes, depreciation and amortization (EBITDA) to interest coverage ratio is used to assess a company's financial durability, by examining whether it is profitable enough to pay off its interest expenses.

"Our view is based on the company's persistently high debt-funded capital spending amid tough operating conditions," it said.

The rating company said Vinacomin could borrow more over the next two years to maintain coal production and develop power projects. It expected Vinacomin's debt to increase to VND90 trillion to VND95 trillion (US$4-4.2 billion) by 2016, substantially higher than VND74 trillion ($3.3 billion) in 2014.

It's possible that lower coal prices and volumes made S&P lower Vinacomin's annual EBITDA to VND13 trillion to VND15 trillion (US$556-667 million). The company's EBITDA in 2014 reached VND15.7 trillion ($698 million).

According to S&P, Vinacomin is exposed to currency swings. Declining export sales, increasing sales to the Electricity of Vietnam (EVN) and the prospect of rising interest rates in the United States will likely squeeze the company's interest coverage ratio, particularly on American dollar-denominated debt.

Vinacomin's management and governance is also assessed as "weak," given the company's complex organisational structure with 85 subsidiaries and associates, along with more than 150 projects currently in the pipeline.

"The stable outlook reflects our view that Vinacomin's financial risk profile will stabilise at lower levels because of weaker margins and rising debt," it said.