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Fitch affirms Melstacorp & Distilleries at ‘AAA’; outlook stable

Oct 23, 2019 (LBO) – Fitch Ratings has affirmed the National Long-Term Ratings of Sri Lanka-based conglomerate Melstacorp and its subsidiary Distilleries Company at 'AAA(lka)' with a stable outlook.

Fitch said it rates Distilleries based on the consolidated profile of Melstacorp due to strong legal and operational linkages between the two entities, as defined in their parent and subsidiary rating linkage criteria.

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Distilleries contribute around 70 percent to Melstacorp's consolidated EBITDAR, share the same board of directors and have previously provided financial support to weaker group entities in the form of corporate guarantees.

"The affirmations reflect Melstacorp's ability to maintain leverage below 2.0x over the medium-term, despite large investments in core and non-core operations," the Fitch Ratings said.

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"Leverage is defined as net adjusted debt/operating EBITDAR, including Melstacorp's 51%-share of Aitken Spence PLC's ne debt and EBITDA, but excluding its insurance subsidiary."

Melstacorp saw net leverage weaken to 1.8x in the financial year ending March 2019 (FY19), from 1.3x in FY18, following significant debt-funded investments.

The group's investment drive is supported by the strong operating cash flow of its core subsidiary, Distilleries, which is Sri Lanka's market leader in spirits, enjoying a strong brand presence and high entry barriers.

"We expect DIST to account for around 70% of Melstacorp's group EBITDA, including its 51% share of Aitken Spence, over the medium-term," the Fitch Ratings said.

"The ratings of Melstacorp and DIST could come under pressure if Melstacorp continues to make large debt-funded investments that dilute the cash-flow stability of its core spirits business or are not immediately cash-flow accretive.

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