Fitch revises 7, affirms 7 SL non-fin corporates’ ratings on national rating scale revision

Fitch Ratings has taken rating action on Sri Lankan non-financial corporates following the recalibration of its Sri Lankan National Rating scale to reflect changes in the relative creditworthiness among the country’s issuers following the downgrade of the sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below. For details, see “Fitch Ratings Recalibrates its Sri Lankan National Rating Scale”, dated 22 December 2020, at www.fitchratings.com/site/pr/10147729.

The recalibration of our Sri Lankan National Rating scale has resulted in rating affirmations in some cases and the assignment of revision ratings to others. Revision ratings are used to modify ratings for reasons that are not related to credit quality.

A full list of Fitch’s rating actions is at the end of this commentary:

Dialog Axiata PLC

  • National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable

Distilleries Company of Sri Lanka PLC (DIST)

  • National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable

Melstacorp PLC

  • National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable

Hemas Holdings PLC

  • National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable

Lion Brewery (Ceylon) PLC

  • National Long-Term Rating affirmed at ‘AAA(lka)’; Outlook Stable

Lakdhanavi Limited

  • National Long-Term Rating affirmed at ‘AA+(lka)’; Outlook Stable

Sunshine Holdings PLC

  • National Long-Term Rating revised to ‘AA+(lka)’ from ‘A(lka)’; Outlook Stable

Abans PLC

  • National Long-Term Rating revised to ‘AA(lka)’ from ‘BBB+(lka)’; Outlook Stable

Singer (Sri Lanka) PLC

  • National Long-Term Rating revised to ‘AA(lka)’ from ‘BBB+(lka)’; Outlook Stable

DSI Samson Group (Private) Limited (DSG)

  • National Long-Term Rating revised to ‘AA(lka)’ from ‘BBB(lka)’; Outlook Stable

Sri Lanka Telecom PLC (SLT)

  • National Long-Term Rating revised to ‘AA-(lka)’ from ‘AA+(lka)’; Outlook Stable

Ceylon Electricity Board (CEB)

  • National Long-Term Rating revised to ‘AA-(lka)’ from ‘AA+(lka)’; Outlook Stable

Sierra Cables PLC

  • National Long-Term Rating revised to ‘AA-(lka)’ from ‘BB(lka)’; Outlook Stable

Kotagala Plantations PLC

  • National Long-Term Rating affirmed at ‘RD(lka)’

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch’s international ratings scales or with other countries’ national rating scales.

KEY RATING DRIVERS
For the key rating drivers, key assumptions, financial statement adjustments and liquidity and debt structure analysis, please refer to the previous rating action commentaries via the following links:

Dialog – www.fitchratings.com/site/pr/10116091;

Melstacorp and DIST – www.fitchratings.com/site/pr/10139770;

Hemas and Sunshine – www.fitchratings.com/site/pr/10124711;

Lion – www.fitchratings.com/site/pr/10142686;

Lakdhanavi – www.fitchratings.com/site/pr/10138802;

Abans – www.fitchratings.com/site/pr/10117730;

Singer – www.fitchratings.com/site/pr/10117745;

DSG – www.fitchratings.com/site/pr/10121123;

SLT – www.fitchratings.com/site/pr/10104610;

CEB – www.fitchratings.com/site/pr/10143833;

Sierra – www.fitchratings.com/site/pr/10144831; and

Kotagala – www.fitchratings.com/site/pr/10124108.

DERIVATION SUMMARY
Dialog, Melstacorp, DIST, Hemas and Lion are rated ‘AAA(lka)’ to reflect their stable operating cash flows from defensive demand for end products and strong market shares in core businesses, strong financial profiles and solid liquidity. Dialog, DIST, Melstacorp and Lion Brewery have more dominant market positions than Hemas and therefore can withstand higher leverage for the same rating, as reflected in their rating sensitivities.

Lakdhanavi’s ‘AA+(lka)’ rating reflects stable cash flow generation from fixed long-term operation and maintenance contracts and power purchase agreements. Sunshine’s ‘AA+(lka)’ rating reflects its defensive cash flow from mainly pharmaceutical and medical device sales, and the protected domestic crude palm-oil sector. Lakdhanavi’s rating is moderated by its exposure to the Sri Lanka sovereign as a key counterparty, whereas Sunshine’s rating is moderated by its smaller scale against higher-rated peers. Both companies have strong financial profiles and solid liquidity. Lakdhanavi has more stable operating cash flow than that of Sunshine, in our view, given the latter’s exposure to the competitive value-added tea segment and weather dependent power generation sector, and can therefore withstand higher leverage for the same rating level.

Singer, Abans and DSG are rated at ‘AA(lka)’ to reflect their higher business risk than higher-rated peers, stemming from their exposure to more discretionary demand, such as consumer durables in the case of Singer and Abans, and domestic tyre sales for DSG. DSG is also faced with intense competition in its footwear segment, which accounts for a significant portion of its earnings. All three companies have weaker financial profiles compared with higher-rated peers, but sufficient near-term liquidity.

Sierra’s ‘AA-(lka)’ rating stems from its small operating scale compared with higher-rated peers, cyclical cash flow from its exposure to the domestic infrastructure and construction sector, as well as its tight liquidity.

SLT’s rating is constrained at ‘AA-(lka)’ in line with Fitch’s Government-Related Entities (GRE) Rating Criteria because the Sri Lankan government directly and indirectly has a controlling stake in the company and exercises significant influence over its operations. SLT’s unconstrained standalone credit profile is stronger than that of the government of Sri Lanka, reflecting the company’s market leadership in fixed-line services and second-largest position in mobile, its ownership of an extensive optical-fibre network, and a solid financial profile.

CEB’s ‘AA-(lka)’ rating is equalised with that of its parent, the Sri Lankan sovereign, in line with Fitch’s GRE criteria. This is based on our assessment of a very strong likelihood of support from the state. CEB is the country’s monopoly electricity transmitter and distributor, and also accounts for around 75% of the country’s power generation.

RATING SENSITIVITIES
Dialog

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • There is no scope for an upgrade because Dialog is rated at the highest end on the Sri Lankan National Ratings scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • We do not envisage any negative rating action in the medium-term because of the standalone strength of the business profile, low financial leverage and implied support from the stronger parent.

Melstacorp and DIST

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • There is no scope for an upgrade, as the company is already at the highest rating on the Sri Lankan National Rating scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Consolidated financial leverage – measured as adjusted net debt/EBITDAR (including 51% consolidation of Aitken Spence PLC but excluding Continental Insurance Lanka Limited (National Insurer Financial Strength: A(lka)/Stable)) – increasing to over 5.5x for a sustained period;
  • Group operating EBITDAR/interest paid + rent (including 51% consolidation of Aitken Spence PLC but excluding Continental Insurance Lanka Limited), falling below 1.8x for a sustained period.

Hemas

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • There is no scope for an upgrade, as the company is already at the highest rating on the Sri Lankan National Rating scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Group net debt/EBITDA rising above 4.5x on a sustained basis;
  • Group EBITDA/interest cover falling below 2.3x on a sustained basis.

Lion

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • There is no scope for an upgrade, as the company is already at the highest rating on the Sri Lankan National Rating scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • An increase in Lion’s leverage, measured as total debt net of cash/EBITDA, to over 5.0x for a sustained period;
  • A decrease in EBITDA/interest coverage to less than 2.0x on a sustained basis;
  • Stronger links with parent Carson Cumberbatch PLC under Fitch’s Parent and Subsidiary Linkage Rating Criteria or weakening of the parent’s consolidated credit profile.

Lakdhanavi

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • We do not anticipate any positive rating action in the next two years due to the company’s significant investment plans and counterparty risk profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • LTL Holdings (Private) Limited’s consolidated adjusted net debt/EBITDAR (with proportionate consolidation of its subsidiaries, Lakdhanavi Bangla Power Limited (LBPL 51%) and Feni Lanka Limited (Feni 56%) rising above 5.5x on a sustained basis;
  • LTL Holdings (Private) Limited’s consolidated operating EBITDA/interest paid (with proportionate consolidation of its subsidiaries, LBPL and Feni) falling below 2.0x on a sustained basis;
  • Material weakening of the counterparty risk;
  • Any strengthening of LTL Holdings (Private ) Limited’s linkages with the parent, CEB.

Sunshine

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • Increased scale of operations while maintaining a healthy financial profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • An increase in Sunshine’s leverage – total net debt/operating EBITDA (including proportionate consolidation of Sunshine Wilmar Private Limited) – to more than 4.0x over a sustained period;

-Sunshine’s EBITDA coverage of gross interest (including proportionate consolidation of Sunshine Wilmar Private Limited) falling below 2.3x over a sustained period.

Abans

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • No upgrade in the medium term, given the exposure to more volatile cash flow compared with higher-rated peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Fixed-charge coverage declining below 1.3x on a sustained basis;
  • A significant weakening in the company’s liquidity position.

Singer

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • No upgrade in the medium term, given the exposure to more volatile cash flow compared with higher-rated peers

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Fixed-charge coverage declining below 1.3x on a sustained basis;
  • A significant weakening in the company’s liquidity position.

DSG

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • No upgrade in the medium term, given the exposure to more volatile cash flow compared with higher-rated peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Fixed-charge coverage declining below 1.5x on a sustained basis;
  • A significant weakening in the company’s liquidity position.

SLT

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • An upgrade in the Sri Lankan sovereign’s Long-Term Issuer Default Rating (IDR) could result in a upgrade of SLT’s National Long-Term Rating.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • A downgrade in the Sri Lankan sovereign’s Long-Term IDR could result in a downgrade of SLT’s National Long-Term Rating.

CEB

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • An upgrade of the Sri Lankan sovereign’s Long-Term IDR could result in corresponding action on CEB’s National Long-Term Rating.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • A significant weakening in the likelihood of support from the sovereign;
  • A downgrade of the Sri Lankan sovereign’s Long-Term IDR could result in corresponding action on CEB’s National Long-Term Rating.

Sierra

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • An increase in Sierra’s scale of operations measured by EBITDA relative to higher-rated peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Leverage above 4.0x on a sustained basis;
  • Coverage falling below 1.5x on a sustained basis;
  • Significant deterioration in liquidity.

Kotagala

Factors that could, individually or collectively, lead to positive rating action/upgrade:

  • Following a possible financial restructuring and when sufficient information is available, the ‘RD (lka)’ rating will be upgraded to reflect the appropriate National Long-Term Rating for the post-restructuring capital structure, risk profile and prospects, in accordance with our criteria.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Kotagala entering into bankruptcy filings, administration, liquidation or other formal winding-up procedures.

Sri Lanka Sovereign Long-Term IDR:

For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in our Rating Action Commentary of 27 November 2020.

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

  • External Finances: Improvement in external finances, supported by higher non-debt inflows or a reduction in external sovereign refinancing risks from an improved liability profile.
  • Public Finances: Stronger public finances, accompanied by a sustained decline in the general government debt to GDP ratio, closer to the ‘B’ median, underpinned by a credible medium-term fiscal consolidation strategy.
  • Structural: Improved policy coherence and credibility, leading to more sustainable public and external finances and a reduction in the risk of debt distress.

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

  • Increased signs of a probable default event, for instance from severe external liquidity stress, potentially reflected in an ongoing erosion of foreign exchange reserves and reduced capacity of the government to access external financing.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
CEB’s ratings are equalised with that of its parent, the Sri Lankan sovereign, while SLT’s ratings are capped by the sovereign’s credit profile, in line with Fitch’s Government-Related Entities Rating Criteria.