Fitch assigns Abans’s proposed debenture BBB+(lka)(EXP)

abans

Fitch Ratings has assigned Abans PLC’s (Abans; BBB+(lka)/Stable) proposed senior unsecured debenture issue of up to LKR1.5bn a National Long-Term Rating of ‘BBB+(lka)(EXP)’.

The debentures will have tenors of three, four and five years and carry fixed and floating coupons. The debentures are to be listed on the Colombo Stock Exchange, with the proceeds to be used to refinance existing debt.

Abans’ senior unsecured debt is rated at the same level as its National Long-Term Rating, as the debentures rank equally with other senior unsecured obligations. The final rating is subject to the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Demand to Weaken: Fitch expects demand for consumer durables to be sluggish in the next six to 12 months due to rising interest rates, an increase in taxes on consumer durables and a depreciating Sri Lankan rupee, which raises the prices of imported goods that account for the majority of products sold by Abans. However, Fitch believes the long-term fundamentals driving demand for the consumer-durables sector is still strong.

Defensive Market Position: Fitch believes Abans’ strong brand portfolio, extensive dealer network and well-managed inhouse hire-purchase book will help defend the company’s market position during a downturn. Abans has also widened its product portfolio to include low-priced, Abans-branded products to make its business more resilient in a downturn.

Margins to Contract and Stabilise: Fitch expects Abans’ EBITDAR margins to contract marginally in the financial year ending 31 March 2017 (FY17) due to weaker demand, which puts pressure on Abans to sacrifice margins to protect the top line. However, we expect Abans’ medium-term EBITDA margins to settle in the high-single digits because of improvements in profitability of its low-margin IT and mobile segment, and efficiency gains from store rationalisation and leaner inventory management.

Strengthening Credit Profile: Abans’ credit profile continued to improve in the last 12 months, with leverage improving to 5.2x in FY16 (FY15: 6.6x), mainly due to strong EBITDAR generation. However, the company has been slow to deleverage due to higher working capital investments, capital infusions to subsidiaries and returns to shareholders. Fitch believes Abans will maintain its current credit profile in the next 12-18 months and improve thereafter, but positive rating action is unlikely unless there is significant deleveraging by the company.

Project Risk Remains: Construction at the Colombo City Center (CCC) mixed development project, a JV between Abans and Singapore-based property developer Silver Needle Hospitality, has started after a delay of around six months. The project is now due to be completed in mid-2019. Further delays or cost escalations could weigh on Abans’ rating, despite the progress made in pre-sales and debt funding.

Less Pressure from AFP: Abans’ finance subsidiary, Abans Finance PLC (AFP), should see its capital improve to well above the regulatory minimum and to levels commensurate with its risk appetite, after a rights issue and a proposed private placement in FY17. This will reduce pressure on Abans to inject more capital into the subsidiary in the medium term. Abans took up LKR165m of AFP’s rights issue in FY17.

KEY ASSUMPTIONS

Fitch’s key assumptions within our rating case for the issuer include:
– Revenue growth to average in the low double digits over FY17-FY20
– EBITDAR margins to contract in FY17, but to stabilise in the high single-digit range in the medium term
– Capex to average LKR300m a year; mainly for maintenance capex and another LKR750m investment in the CCC project over FY18-FY19
– No capital infusions to AFP in the medium term
– A dividend payout ratio of 15% in FY17-FY20

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
– A sustained improvement in Abans’ adjusted net debt/EBITDAR excluding AFP to below 4.5x
– Smooth progress of the Colombo City Centre project, which will limit Abans’ financial liability to the current committed amount
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
– A sustained increase in Abans’ adjusted net debt/EBITDAR excluding AFP to over 5.5x
– Fixed-charge coverage (ratio of EBITDAR to gross interest + rent excluding AFP) reducing below 1.25x (FYE16: 1.9x) on a sustained basis
– Significant delay in the Colombo City Centre project or additional capital calls for the project

LIQUIDITY

As of end-FY16, Abans was in a manageable liquidity position with only LKR4.8bn of unutilised but committed credit lines and about LKR800m of unrestricted cash available to meet LKR9.9bn of debt maturing in the next 12 months. However, the majority of company’s short-term debt is revolving, while Abans’ liquidity position is also supported by LKR12bn of inventory and receivables outstanding and a hire purchase balance of LKR6.7bn as at end-FY16.