Fitch rates Singer’s four-year debenture ‘A+(lka)’

June 26, 2006 (LBO) – Singer (Sri Lanka) Ltd secured a A+(lka) ratings for their upcoming four-year 600 million rupee debenture from Fitch Ratings Lanka, the rating agency said Monday. Fitch also affirmed Singer’s outstanding debentures:
• 200 million rupees 2004/2008
• 250 million rupees 2004/2008
• 300 million rupees 2005/2009
• 400 million rupees 2005/2008 & 2009
• 500 million rupees 2005/2009 unsecured debentures

The rating outlook is stable.

Bulk of the proceeds from the upcoming issue will be used to expand Singer’s consumer financing operations, with the balance will be used to partially retire bank debt that mature this year.

The ratings are supported by the company’s position as the largest consumer durables retailer in the country, its strong and sustainable sales growth backed by its profitable and well-managed consumer financing operation and good earnings retention.

Over the years, Singer has introduced a number of new store formats and broadened the product range to appeal to a wider range of customers.

In FY05, Singer reported total sales rose 26 percent to 10,866 million rupees, while operating profits topped 3,594 million rupees.

The firm has maintained a 33.0 percent gross margin, despite profit from retailing operations coming under pressure from recent hikes in taxes and duties.

The interest earned on a larger consumer loan book, helped mitigated the effects of this.

However, earnings before interest tax dividends and amortization (EBITDA) margins slipped to 10.2 percent in FY05 from 12.0 percent in FY04 reflecting the increases in collection commissions, lease commitments on new retail outlets and increased royalty payments to Singer Asia.

Fitch believes much of the increased duties and taxes will be translated to higher retail prices in FY06 to ensure profitability in the local retail operations.

Access to consumer financing to a large extent also mitigates the impact of price increases on consumer demand.

Much of the debt of the company is related to its consumer financing operation.

At end of the first quarter of 2006, Singer’s loan book had expanded to 5.1 billion rupees.

Fitch appreciates that such operations require a more levered capital structure than that of a pure retailing operation.

Although Singer is leveraged high on a composite basis at 4.5x (measured by total adjusted net debt/ EBITDAR) for the rating category, once adjusted for the effects of consumer financing operations, leverage is comfortable for the current ratings.

In doing so, the agency has taken comfort in the quality of the consumer loan book where defaults have been maintained below 2-percent in the past.

The debt at the company will continue to increase with its expanding consumer financing operations and working capital driven by sales growth and new store openings.

However, should retail margins and interest spread on consumer loans be maintained, the agency does not expect the leverage of Singer Sri Lanka to change much over the short to medium term from its current levels.

The ratings will come under pressure if there is any weakening in its margins and/or the quality of its consumer loan book.

Singer had a total debt of 4,355 million rupees at end-FYE05, of which capital market debt accounted for 38.0 percent.

Besides the overdrafts and short-term facilities of 1,584million rupees, 30.0 percent of debt is due in 2006.

Debt maturities, largely debentures, peak in 2009 (645 million rupees) and 2010 (1,050 million rupees) and will have to be re-financed.

Although high, Fitch believes this is manageable given Singer’s access to alternative funding sources. The company’s liquidity is supported by committed-undrawn credit facilities of 1.2 billion rupees.

Singer is Sri Lanka’s largest consumer durables retailer in terms of revenue and distribution network, which consists of over 690 points of presence.

Broadly 52.0 percent of Singer’s sales are financed by its in-house consumer financing operation. Interest earned on consumer loans accounted for 13.0 percent of the company’s top-line in FY05.