Sri Lanka Hayleys ‘AA-(lka)’ rating confirmed

May 31, 2010 (LBO) – Fitch Ratings said it had confirmed an ‘AA-(lka)’ rating on Sri Lanka’s Hayleys Ltd, on expected higher profitability of operating subsidiaries though its debt has increased due a recent purchase of a hotel. “Weak global economic conditions and currency fluctuations, especially with a weaker Euro, can exert pressure on the demand and margins for Hayleys’ products,” Fitch said.

“As an export-oriented company, Hayleys is adversely affected by the strength of the Sri Lankan Rupee and rising domestic inflation.”

The holding company’s leverage had increased during the year mainly as a result of an 1.8 billion rupees debt funded investment in Hotel Services (Ceylon), a Colombo city hotel.

Fitch said it was a concern as the investment will not bring sizable dividends in the short to medium term. By March 2010 net debt had increased by 1.4 billion rupees to 1.8 billion rupees.

Including 112 million rupees of subsidiary debt with recourse to the company, Hayleys’ had net adjusted debt to operating EBITDAR (earnings before interest, tax, depreciation, amortization and rent) had increased to 4 times in 2010 from 2.7 times a year earlier.

Consolidated net debt increased to 8.6 billion rupees as at end March 2010 (from 6.9 billion a year earlier) given both the consolidation of Hayleys MGT PLC and increased investment spending.

The consolidated adjusted debt net of cash to operating EBITDAR remained at 2.2 times in FY10 (FY09: 2.2 times) given improved group earnings.

Fitch says that Hayleys’ liquidity position is adequate. But higher debt at holding company level will increase debt amortization.

Updated “The rating reflects Hayley’s diverse dividend income base as a holding company, and its strong control over the operational and financial policies of its subsidiaries, which mitigates the subordination of group cash flows to its operating subsidiaries,” Fitch said.

The rating had a ‘stable’ outlook.

In the year ending March 2010, dividend income accounted for 80 percent of Hayleys’ revenues of 628 million rupees. Expected higher profitability would increase dividends from key divisions.

A turnaround in a medical glove unit in Thailand, discontinuation of loss-making units in consumer and transport, as well as the gradually increasing value addition in its purification segment would strengthen profits.

But Hayley’s operations were exposed to foreign currency risks, vagaries of the weather and industry cycles, Fitch said.

Nearly 67 percent of Hayley’s total revenues in the 2010 financial year were generated from exports – Europe (34 percent of export revenues) and US (21 percent).

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