Fitch rates Lion Brewery’s Unsecured Debentures Final ‘AA-(lka)’

Monday, 17 November 2014 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings has assigned Sri Lanka-based Lion Brewery PLC’s (Lion; AA-(lka)/Stable) unsecured redeemable debenture issue of up to LKR2bn a final National Long-Term rating of ‘AA-(lka)’. The assignment of the final rating follows the receipt of documents conforming to information previously received, and is line with the expected rating assigned on 4 September 2014. The debenture rating is in line with Lion’s National Long-Term Rating as the debentures constitute unconditional, unsubordinated and unsecured obligations of the company. The debenture, which is structured with a bullet maturity at the end of five years, is to be issued at a fixed rate, and is intended to refinance short-term debt, minimising exposure to short-term floating rate funding. KEY RATING DRIVERS High Leverage: Leverage, as measured by net adjusted debt/operating EBITDAR increased to 2.48x at end-October 2014, up from 2.05x a year earlier following the completion of Lion’s acquisition of competing domestic brewer Millers Brewery Limited (MBL) and its trademarks, with the acquisition cost in line with our expectation. The acquisition comes on the heels of expansion at Lion’s production facility, which resulted in high debt over the financial year ended 31 March 2013 (FY13) and FY14. Leverage over FY14 and FY13 was 2.11x and 2.59x respectively, exacerbated by margin deterioration as Lion had to sell more costly imported canned beers at the same price as domestic production. Fitch expects leverage metrics to improve over the medium term, driven by improved profitability with the replacement of canned imports by local production from mid-FY14. Increased Production Capacity: Lion has almost doubled its production capacity, allowing it to meet additional demand without further significant debt-funded capex. The expanded production facility will be able to accommodate integration of MBL’s volumes, which could enhance economies of scale. Market Leadership: Lion is the leading beer producer in Sri Lanka, with sales led by its flagship Lion brand. The MBL acquisition will be favourable for Lion’s business risk profile as it will increase Lion’s share of beer production in the country. The acquisition will also add new products such as MBL’s Three Coins, Sando, and Grand Blonde brands to Lion’s portfolio. High Regulatory Risk: The Sri Lankan government frequently raises taxes on domestic alcohol production to curb consumption, which encourages consumers to turn to illicit sources and depresses industry profitability. Lion was hit with two excise duty increases in October 2014. There are also restrictions on advertising and retailing of alcohol, which inhibit growth of consumption, although this allows incumbent licensed players with established brands and distribution networks, such as Lion, to preserve their market share. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - Leverage of over 2.0x on a sustained basis No positive rating action is expected over the next 24 months as leverage is likely to remain high. However, future developments that may individually or collectively lead to a positive rating action include: - Leverage of below 1.5x on a sustained basis.