Sri Lanka Hayleys rating on negative watch after acquisition

Nov 12, 2010 (LBO) – Sri Lanka’s Hayleys’ rating has been place on a ‘negative’ watch after the firm took on 2.0 billion rupees in debt to buy Alumex, an aluminum extrusion company for 2.1 billion rupees, Fitch Ratings Lanka said. The ‘rating watch negative’ could result in a downgrade of the firm’s AA-(lka) investment grade after the impact of the deal is further examined or confirmed.

The negative watch reflected the agencies concern that the increase in debt increased the firm’s leverage beyond the ‘AA-(lka)’ level.

By end September 2010, Hayleys’ total debt at holding company level was 2.1 billion rupees and leverage (total net debt to earnings before interest, tax, depreciation, amortization and rentals) was 3.5 times.

Fitch said the 2.0 billion rupees in new debt would “will deteriorate this leverage level significantly.”

“The rating could be downgraded immediately, if it emerges that Hayleys is unable to maintain leverage closer to pre-acquisition levels as a result of certain planned measures that the management expect to implement over the near-term,” the agency said.

In May Fitch had said that an increase in debt at the parent from long payback investments with limited control over dividend policy could put pressure on ratings.

Fitch said that proposed plans at Hayleys’ newly announced wind power project as well as expected refurbishment plans at Ceylon Continental Hotel in Colombo city will increase indebtedness at the group level and are concerns for its rating.

“These also include the fact that based on H111 (first half 2011 financial year) figures, Hayleys’ hand protection, fiber and textile segments are currently stressed,” Fitch said.

“Therefore, the agency notes that the group’s better performing segments such as transportation, agri-inputs and plantations will be required to increase their dividend contributions to the holding company to maintain appropriate leverage and coverage.”

Fitch said it will also re-evaluate Hayley’s debt service coverage (as measured by interest and principal payments to funds from operations) over the medium-term, based on increased interest and capital repayments levels, as well as offsetting expected future cash inflows.