Abans goes for Rs. 2 billion debenture; Fitch assigns ‘A-(EXP)’
Wednesday, 25 September 2013 00:48
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Fitch Ratings has assigned Abans Limited’s proposed issue of senior unsecured redeemable debentures of up to Rs. 2 b an expected National Long-Term rating of ‘A-(lka)(EXP)’.
The rating is contingent upon the final transaction documents conforming to information already received.
The proposed debentures are rated in line with the Sri Lanka-based retailer’s National Long-Term Rating of ‘A-(lka)’, as they will rank equally with the company’s other senior unsecured creditors.
The debenture is expected to be issued in three tranches with maturities of three, four, and five years at fixed coupon rates.
The proceeds will be used to re-finance part of the company’s short-term borrowings, lowering the cost of funds, and will help reduce Abans’ exposure to refinance- and interest rate risk.
Key rating drivers are as follows:
Higher leverage: The Negative Outlook on the Issuer’s National Long-Term rating reflects net leverage above the trigger of 4.5x lease-adjusted net debt/operating EBITDAR (ex. Abans Finance PLC) at 4.60x in FYE13 (financial year ends in March), up from 2.67x in FYE12.
Leverage increased as a result of debt incurred to fund Abans’s stake in its real estate development Joint Venture, the Colombo City Mall, in addition to bridging finance extended to a related company that housed what was once the group’s motorcycle retail business.
Fitch expects slower revenue growth for Abans in FYE14, leading to lower profitability in the company’s cyclical core business of consumer durables. This may constrain Abans’ ability to reduce its leverage below 4.5x by FYE14 and beyond, even if the bridging loan were repaid by the counterparty.
Strong market share: Strong brands, in addition to an extensive distribution network of 1,059 outlets, 439 of which are Abans’ own stores, contribute to Abans’ position as a leading consumer durables retailer in Sri Lanka. Abans’ revenue concentration on LG has reduced over the last three- to four years in favour of other brands such as HP, Haier, Toshiba, Philips, Whirlpool, and Sanyo.
Moderate refinancing risk: At FYE13, Abans had LKR459m and LKR1.6bn of cash and unutilized credit facilities, respectively against LKR2.3bn debt maturing in FY14. Fitch expects free cash flow (FCF, defined as operating cash after dividends and capex) to remain negative in FY14 due to the working capital-intensive nature of the retail business, which will require a further increase in borrowings. These risks are mitigated by the strength of Abans’s core business and its access to domestic banks.
Rating sensitivities are as follows:
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
Leverage being sustained above 4.5x at FYE14 and beyond
Fixed charge coverage (measured as EBITDAR/Interest expense + rent) falling below 1.25x on a sustained basis (FYE13:1.53x)
Material deviation in its real estate project from current expectations resulting in further cash injections from Abans
A material weakening of the credit profile of Abans Finance PLC
Positive: No positive rating action is expected given that the rating is on a Negative Outlook. However, future developments that may individually or collectively lead to the Outlook being revised to Stable include:
Leverage falling below 4.5x on a sustained basis
Smooth progress of its real estate project which will limit Abans’ financial liability to the initial investment value.
