Sri Lanka Hayleys to sell Rs2.0bn debt

Apr 12, 2013 (LBO) – Sri Lanka’s Hayleys Plc, a diversified group will sell 2.0 billion rupees of listed unsecured debt which will have been rated ‘AA-‘ by RAM Ratings Lanka. RAM said the group’s business was diversified with strong markets in gloves and activated markets.

But the group’s debt had increased 30 percent year-on-year to 21.56 billion rupees during the 2012 financial year (23.04 billion by end September 2012), and group gearing had risen to 0.80 times by end September 2012, from 0.78 in March.

At company level, debt had increased particularly in the first half of 2013 with it gearing ratio deteriorating to 0.86 times from 0.53 time in the 2011 financial years.

RAM said the company had control over dividend policy of subsidiaries and could declare dividends when required.

“On the other hand, the Group’s liquidity position continued to be tight,
given its heavy reliance on short-term borrowings (which include trade facilities)
and its relatively low cash reserves,” RAM said.

The rating agency said its fund from operations to debt coverage stood at 0.25 times as at end March 2012, before improving to 0.37 times by end-September 2013.

RAM said group debt levels are expected to increase with capacity expansion but gearing levels will be unchanged at 8.0 helped by higher profits generation.

RAM Ratings Lanka assigns AA- rating to Hayleys PLC’s proposed
LKR 2.0 billion debentures

RAM Ratings Lanka has assigned a long-term issue rating of AA- to Hayleys PLC’s
(“Hayleys” or “the Company”) proposed LKR 2.0 billion Listed, Rated, Unsecured,
Redeemable Debentures. Concurrently, we have reaffirmed the Company’s
respective long- and short-term corporate credit ratings at AA- and P1. The longterm
ratings carry a stable outlook.

Hayleys is a diversified conglomerate with interests in hand protection,
purification, transportation, agriculture, plantations, textiles, construction
materials, fiber, consumer, industrial solutions, power and energy together with
leisure and aviation (Hayleys, along with its subsidiaries will collectively be
referred to as “Hayleys Group” or “the Group”).

The ratings continued to be supported by the Group’s diversified business
portfolio, which has enabled it to withstand adversities affecting a particular
industry. The Group enjoys strong market positions in several of its key
businesses. It is the world’s largest producer of coconut shell-based activated
carbon, with an estimated market share of 15%-16%. The Group accounts for
around 5% of the global market for non-medical gloves, and is a sizeable
plantations player, producing around 4.5% and 2.0% of the country’s tea and
rubber, respectively.

That said, the Group’s key businesses are sensitive to fluctuations in commodity
prices, which directly affect its margins, as demonstrated in the past. In addition,
Hayleys is exposed to foreign exchange rates, given its reliance on exports.
During the initial rating, we had raised concerns on the Group’s loss-making
textile arm, Hayleys MGT Knitting Mills PLC (“Hayleys MGT”), which had weighed
down its performance. Although Hayleys MGT continued to be in the red in FYE 31
March 2012 (“FY Mar 2012”), we note that its performance had improved in 1H
FY Mar 2013, with the division breaking-even at operational level, supported by a
capital infusion from Hayleys.

Meanwhile, the Group’s debt burden continues to be high, reflective of its debt funded
acquisitions over the past few years. Its total debt increased nearly 30%
y-o-y in fiscal 2012 to LKR 21.56 billion (end-September 2012: LKR 23.04
billion). That said, the Group’s gearing level of 0.78 times as at end-FY Mar 2012
was in line with our expectations; gearing (total debt/total equity) had risen slightly to 0.80 times by end-September 2012.

We note that Hayleys’ debt at
company level had also increased, particularly in 1H fiscal 2013, with its gearing
ratio deteriorating to 0.86 times (end-fiscal 2011: 0.53 times). However, our
concerns are somewhat mitigated by the fact that the Company has control over
the dividend policies of its subsidiaries, which enables dividend upstreaming when
required. On the other hand, the Group’s liquidity position continued to be tight,
given its heavy reliance on short-term borrowings (which include trade facilities)
and its relatively low cash reserves.

The Group’s debt-protection metrics remained adequate and in line with our
expectations. Its funds from operations (“FFO”) debt coverage stood at 0.25
times as at end-March 2012, before improving to 0.37 times by end-September
2013. Going forward, although the Group’s debt levels are expected to increase
as it pursues capacity expansions, its gearing levels are anticipated to remain
relatively unchanged, supported by healthy profit generation.

As such, the
Group’s ratings factor in our expectation that its gearing will remain at around
0.80 times, whilst its FFO debt coverage comes up to around 0.30 times.