Fitch rates Singer’s proposed debenture issue A-(lka)(EXP)

Fitch-Ratings

Fitch Ratings has assigned Singer (Sri Lanka) PLC’s (Singer;A-(lka)/Stable) proposed senior unsecured debenture issue of up to LKR4bn a National Long-Term Rating of ‘A-(lka)(EXP)’.

The debenture is to be issued at a fixed rate with a tenor of three years. The proceeds of the proposed issue will be used to refinance existing debt.

Singer’s proposed 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 Singer. However, Fitch believes the long-term fundamentals driving demand for the consumer-durables sector is still strong.

Strong Market Position: Fitch expects operating challenges to be mitigated by Singer’s strong market leadership, which is supported by a wide retail presence, its portfolio of well-known brands and extensive local manufacturing capabilities compared with peers. Singer’s extensive in-house brands, which are competitively priced compared with similar imported products, and the company’s well-managed hire-purchase business make products affordable even in a weak operating environment.

Margins Under Pressure: Singer’s EBITDA margins have deteriorated significantly in the last few years due to the company’s increased focus on low-margin IT and digital media products. We do not expect a change in this strategy as the short replacement cycles and low prices of such products help the company to sustain growth through cycles. As such, we expect overall EBITDA margins during 2016-2019 to remain below the double-digit levels of the past.

Leverage to Improve Post-2017: We estimate Singer’s net adjusted leverage (measured as adjusted net debt/EBITDAR, excluding Singer Finance) to spike in 2016 due to the acquisitions of two affiliates and a sluggish operating environment, which will put pressure on EBITDAR. However, we expect leverage to improve from 2017 with a turnaround in the operating environment.

Well-Capitalised Finance Subsidiary: Fitch does not expect Singer to have to infuse more capital into its finance subsidiary, Singer Finance (Lanka) PLC (BBB(lka)/Stable) due to its strong capitalisation, which is well above the regulatory minimum; better than peer asset quality; and strong funding profile.

KEY ASSUMPTIONS

Fitch’s key assumptions within the rating case for the issuer include:

– Revenue growth of low-double digits during 2016-2019 driven by demand for IT and digital media products, which will partly offset softness in the consumer durables market

– Slight margin contraction during 2016-2019 as the revenue mix continues to shift towards the low-margin IT and digital media segment

– Capex to average LKR700m a year during 2016-2019

– No capital infusions to Singer Finance (Lanka) PLC in 2016-2019

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

– A sustained increase in Singer’s leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (end- 2015: 4.7x)

– EBITDA margins sustained below 7% (end-2015: 8.7%)

– Any significant equity support to Singer’s 80% subsidiary, Singer Finance (Lanka) PLC

Positive: Future developments that may individually or collectively lead to a positive rating action include:

– Singer’s leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) falling below 4.5x on a sustained basis

– EBITDA margins sustained above 10%

LIQUIDITY

At end-June 2016, the group (excluding its finance company subsidiary) had LKR1bn of cash and LKR6bn in unused facilities to meet LKR7.2bn of short-term debt, leaving the company in a stable liquidity position. However, we do not expect the company to generate positive FCF in the next 12 months due to higher-than-historical capex.