RAM assigns AA- rating to Hayleys’ Rs. 2 b debentures

RAM Ratings Lanka has assigned a long-term issue rating of AA- to Hayleys PLC’s proposed Rs. 2.0 billion listed, rated, unsecured, redeemable debentures. Concurrently, they have reaffirmed the company’s respective long and short-term corporate credit ratings at AA- and P1. The long-term ratings carry a stable outlook.

Hayleys is a diversified conglomerate with interests in hand protection, purification, transportation, agriculture, plantations, textiles, construction materials, fibre, consumer, industrial solutions, power and energy together with leisure and aviation.

The ratings continued to be supported by the group’s diversified business portfolio, which has enabled it to withstand adversities affecting a particular industry. The Group enjoys strong market positions in several of its key businesses. It is the world’s largest producer of coconut shell-based activated carbon, with an estimated market share of 15%-16%. The Group accounts for around 5% of the global market for non-medical gloves and is a sizeable plantations player, producing around 4.5% and 2.0% of the country’s tea and rubber, respectively.

That said, the group’s key businesses are sensitive to fluctuations in commodity prices, which directly affect its margins, as demonstrated in the past. In addition, Hayleys is exposed to foreign exchange rates, given its reliance on exports.

“During the initial rating, we had raised concerns on the Group’s loss-making textile arm, Hayleys MGT Knitting Mills PLC, which had weighed down its performance. Although Hayleys MGT continued to be in the red in FYE 31 March 2012 (“FY Mar 2012”), we note that its performance had improved in 1H FY Mar 2013, with the division breaking-even at operational level, supported by a capital infusion from Hayleys,” RAM said.

Meanwhile, the group’s debt burden continues to be high, reflective of its debt-funded acquisitions over the past few years.

Its total debt increased nearly 30% y-o-y in fiscal 2012 to LKR 21.56 billion (end-September 2012: LKR 23.04 billion). That said, the group’s gearing level of 0.78 times as at end-FY Mar 2012 was in line with our expectations; gearing (total debt/total equity) had risen slightly to 0.80 times by end-September 2012. We note that Hayleys’ debt at company level had also increased, particularly in 1H fiscal 2013, with its gearing ratio deteriorating to 0.86 times (end-fiscal 2011: 0.53 times).

“However, our concerns are somewhat mitigated by the fact that the company has control over the dividend policies of its subsidiaries, which enables dividend upstreaming when required. On the other hand, the group’s liquidity position continued to be tight, given its heavy reliance on short-term borrowings (which include trade facilities) and its relatively low cash reserves,” RAM said.

The group’s debt-protection metrics remained adequate and in line with RAM’s expectations. Its funds from operations (“FFO”) debt coverage stood at 0.25 times as at end-March 2012, before improving to 0.37 times by end-September 2013. Going forward, although the group’s debt levels are expected to increase as it pursues capacity expansions, its gearing levels are anticipated to remain relatively unchanged, supported by healthy profit generation.

As such, the group’s ratings factor in our expectation that its gearing will remain at around 0.80 times, whilst its FFO debt coverage comes up to around 0.30 times, RAM said.