Fitch affirms Kotagala Plantations at ‘CC(lka)’

Fitch Ratings has affirmed Sri Lanka-based Kotagala Plantations PLC’s National Long-Term Rating at ‘CC(lka)’. Fitch has also affirmed the National Rating on Kotagala’s outstanding senior secured debentures at ‘CC(lka)’.

The affirmation reflects the company’s continued weak liquidity profile despite improved revenue and EBITDA, asset disposals and restructuring of bank facilities over the previous 12 months. Kotagala had Rs. 27 million of unrestricted cash and no unutilised credit facilities as at end-March 2018 (FY18) to meet Rs. 671 million of short-term debt falling due in the next 12 months. There is a significant risk that Kotagala may not be able to meet its obligations as they fall due through internally generated cash flow.

Key rating drivers

Continued Weak Liquidity: We expect the company to continue facing high liquidity pressure in the next 12-18 months due to substantial debt maturities falling due starting 26 May 2018, when the first Rs. 250 million principal repayment of its Rs. 1 billion secured debenture falls due. The company holds little cash, does not have access to unutilised committed credit lines and is greatly constrained from generating positive free cash flow over the medium term due to losses from its rubber plantations and high debt-servicing costs. The company’s efforts in FY18 to lower debt via asset disposals and debt restructuring have not led to a sustained improvement in its liquidity profile.

Kotagala plans to meet its upcoming repayment by using the Rs. 100 million proceeds from the partial sale of its stake in Union Commodities Ltd. (Unicom) in March 2018, Rs. 55 million from the sale of old rubber trees as timber and its remaining cash reserves. It also aims to raise high-cost credit facilities from customers and has the option of using the debenture’s sinking-fund balance of Rs. 161 million at end-March 2018 to meet any shortfall, if needed. 

Even if Kotagala makes the upcoming repayment, there is little visibility as to how it will meet its remaining debt obligations – including the second principal repayment due May 2019 – unless it operating performance improves significantly or upon third-party support or restructuring.

High Refinancing Risk: We believe Kotagala has high re-financing risk, as lenders are likely to be cautious given the plantation sector’s volatility and the company’s weak financial profile. 

Kotagala’s ability to raise funds through asset disposals is also limited following the divestment of its only profitable subsidiary, Unicom. Furthermore, the company was unsuccessful in raising fresh equity through its rights issue in December 2017 beyond what its parent, Consolidated Tea Plantations Limited (CTPL), injected as part of its share. 

This means Kotagala will likely have to resort to expensive sources to refinance its debt, such as customer advance payments, which could further exacerbate its credit profile.

Leverage to Remain High: Kotagala’s leverage is likely to remain high in the medium term, as we expect moderating commodity prices and continued operating cost increases to adversely affect its EBITDA generation. 

Kotagala’s adjusted net leverage/EBITDAR ratio improved to 9.3x as at end-2017, from 16.5x in FY17 (FY16: 125.3x), mainly from higher global tea prices, which we do not expect to be sustained.

Volatile EBITDAR: We expect tea and rubber sector profitability to be affected in the medium term by volatile end-market demand, lower labour productivity and cost pressure from periodic wage increases. Kotagala’s tea segment has seen a strong rebound over the past nine months, helped by rising global prices. 

However, prices are likely to moderate over the medium-term with easing supply-side pressure. We do not expect a reversal in rubber-sector operating losses in the next few years owing to lacklustre global prices and high fixed costs.

We estimate Kotagala’s annual EBITDAR to fall to around Rs. 250 million in the medium term (FY17: RS.316 million), while annual interest payments are likely to remain above Rs. 400 million (FY17: Rs. 746 million prior to the sale of Unicom and repayment of associated debt).

Derivation summary

The rating reflects Kotagala’s poor liquidity, excessive leverage and limited medium-term business prospects due to inherent weaknesses in its tea and rubber plantation businesses. These factors result in Kotagala being rated multiple notches below its closest rated peer, Sierra Cables PLC (BB+(lka)/Stable).

Kotagala has moderate linkages with its immediate parent, CTPL, as defined in Fitch’s Parent and Subsidiary Rating Linkage criteria. However, we believe CTPL’s own financial limitations may prevent it from extending timely support to Kotagala. Therefore, we rate Kotagala on a standalone basis.

Key assumptions

Fitch’s key assumptions within our rating case for the issuer:

Average tea price of $ 3.9/kg (FY17: 3.6/kg) and average rubber price of $ 2.0/kg (FY17: 1.9/kg) in FY19 and FY20

Annual EBITDAR to average around Rs. 300 million in FY19 and Rs. 230 million in FY20

Capex to average 4% of revenue from FY19-FY21 due to the replanting of tea and rubber

No dividend outflows from FY19-FY21

Rating sensitivities

Developments that may, individually or collectively, lead to positive rating action:

Significant improvement in the company’s liquidity profile.

Developments that may, individually or collectively, lead to negative rating action

The company entering into a temporary negotiated waiver or standstill agreement following a payment default on a large financial obligation.

Liquidity

High Liquidity Risk: Kotagala had Rs. 27 million of unrestricted cash at end-March 2018 to meet Rs. 671 million of contracted debt maturities due in FY19. The company does not have unutilised committed credit lines at its disposal. Fitch expects Kotagala to post negative free cash flow of around Rs. 130 million in FY19 due to replanting capex to maintain production. We expect Kotagala’s annual interest payments to exceed annual EBITDA generation over the medium term.