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July 2 (The following statement was released by the rating agency)
Fitch Ratings has assigned Singer (Sri Lanka) PLC's proposed senior unsecured redeemable debenture issue of up to LKR1.5bn an expected National Long-Term Rating of 'A-(lka)(EXP)'.
The debentures are rated at the same level as Singer's National Long-Term Rating of 'A-(lka)' because they represent senior unsecured obligations of the company and would rank equally with the company's other senior unsecured debt. The final rating is contingent on the receipt of final transaction documents conforming to information already received.
The debenture is to be issued at a fixed rate with a tenor of three years. Singer plans to use the proceeds from the issue to refinance the USD10m loan falling due in July 2014, and minimise its exposure to short-term floating rate funding.
KEY RATING DRIVERS
Margin Pressure: The National Long-Term rating reflects expectations of continued margin pressure. In 2013, Singer's margins came under pressure due to value-added tax (VAT) revisions and declining demand for consumer durables in a stressed macroeconomic environment. This contributed to higher leverage of 5.3x at end-1Q14 (annualised), up from 4.7x at end-2013 and 3.4x at end-2012. Although Fitch expects revenue will improve, margins are likely to continue to be under pressure as the company increases selling expenses to drive sales.
Strong Market Share: Singer is a leading consumer durable retailer supported by an extensive retail network of over 1,000 retail points, a diverse product portfolio and strong in-house brands. Singer's well-known in-house Singer and Sisil brands are competitively priced and cater to the mass market, providing the company with price-point diversity. Singer's strong reputation is illustrated by its ability to secure agency for new brands, including Beko, Grundig, Sharp and Lenovo, in 2013.
Well-Managed Consumer Loans: In-house hire purchase facilities, which financed about 45% of Singer's sales in 2013 (2012: 44%), make products more affordable and is in line with the mass market proposition of Singer's in-house brands. Singer managed to contain overdue accounts to 3.7% of the portfolio at end-2013 (2012: 2.3%), supported by average durations of less than a year and strong staff incentives for debt recovery, while write-offs were negligible.
Currency Risk: Singer mitigates foreign-currency risk related to imports through local production. Singer manufactures and locally procures close to 35% of products thorough related companies and local suppliers.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A sustained increase in Singer's leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (end-2013: 4.7x)
- EBITDA margin sustained below 7% (end-2013: 8%)
- A material weakening in Singer's (company-level) liquidity profile
- A material weakening of the credit profile of Singer's 80% subsidiary, Singer Finance (BBB+(lka)/Stable), given the strong linkages between the entities
Positive: Future developments that may individually or collectively lead to a positive rating action include:
- Singer's leverage falling below 4.5x on a sustained basis
- EBITDA margin sustained above 10%