Fitch affirms Singer debt at ‘A’; rates proposed bonds ‘A (EXP)’

Fitch Ratings has affirmed retailer Singer (Sri Lanka) PLC’s outstanding senior unsecured redeemable debentures at National Long-Term ‘A(lka)’. The outlook is stable.

Fitch has assigned an ‘A(lka)(EXP)’ expected rating to its upcoming unsecured redeemable debentures of up to Rs. 1.5 billion. The final rating on the debentures is subject to the receipt of final transaction documents conforming to information already received.

The proposed debentures are rated in line with Singer’s existing unsecured redeemable debentures, given that the proposed issue will rank equally with the company’s unsecured creditors, in the event of liquidation. Singer aims to use the debenture proceeds to lengthen the maturity profile of its existing debt, which will improve liquidity and reduce its interest rate risk.

Key Rating Drivers

Strong market position. Singer’s ratings reflect its position as a leading retailer of consumer durable products in Sri Lanka, with strong in-house brands, and a wide distribution network of over 1,000 outlets, including 381 exclusive showrooms. Its Singer and Sisil brands account for the majority of its sales and are well-entrenched in the domestic market. Singer also retails global brands such as Samsung, Hitachi, HTC, Whirlpool, Beko, and Grundig, enabling it to diversify its portfolio across price points and to cater to varying customer needs.

Cyclical demand and currency risk. Singer is exposed to foreign currency risk, as the majority of its products are imported and sold domestically. Singer has reduced this risk to an extent by manufacturing nearly 30% of its products through related companies in Sri Lanka. The non-essential nature of consumer durables also means that demand fluctuates widely through economic cycles, which is a business risk for retailers such as Singer.

Well-managed consumer loans. Singer uses in-house hire-purchase (HP) financing to market its products to rural masses who otherwise have limited access to credit. HP sales accounted for almost 50% of revenue in 2011 and 2012, and typically increase proportionately during slower economic periods. Singer has managed this high-risk and highly profitable portfolio well, helped by average durations of less than one year, average loan-to-value ratios of about 85%, and strong staff incentives for debt-recovery. At end-2012, delinquent HP debt stood at 2% of the portfolio, while write-offs have been negligible.  Weaker demand in 2013. Fitch expects a slowdown in demand for consumer durables in 2013, on the back of a weak domestic economy, particularly if energy prices are increased as expected. Credit sales are likely to support revenue and profit growth during this period. However, inflationary cost pressures are likely to constrain EBITDAR margins, and together with higher working capital requirements, will result in weaker credit metrics. Nevertheless, Singer has sufficient rating headroom.  Satisfactory liquidity. Singer had sufficient approved but unutilised bank and cash reserves to meet Rs. 1.5 billion of maturing term debt in 2013. A further Rs. 5.1 billion of short-term debt funded working capital at company-level. Fitch estimates that in a stressed scenario, Singer is able to pay off over 60% of its short-term debt simply by disposing its inventory at a 25% discount on cost. This, combined with Singer’s access to domestic banks, mitigates any serious liquidity risks in the near-term.

Rating Sensitivities

Negative. Future developments that may individually, or collectively, lead to negative rating action include; a material weakening of Singer’s 80% subsidiary Singer Finance PLC’s (SF, rated BBB+(lka)/Stable), given the strong linkages between the entities

A sustained increase in Singer’s leverage (measured as adjusted net debt/EBITDAR excluding SF) over 4.5x (end-2012: 3.4x).  A material weakening in Singer’s (company-level) liquidity profile. Fixed charge coverage (measured as EBITDAR/interest expense + rent, excluding SF) falling below 1.25x on a sustained basis (end-2012: 2.0x)

Positive. No positive rating action is expected given rating constraints such as the inherent cyclicality of consumer durable sales

Singer’s ratings.

National Long-term expected rating on proposed unsecured debentures: assigned ‘A(lka)(EXP)’

National Long-term rating on Rs. 1.872 billion outstanding senior unsecured redeemable debentures affirmed at ‘A(lka)’/Stable. National Short-term rating on Rs. 1 billion outstanding commercial paper affirmed at ‘F1(lka)’.