March 25 (The following statement was released by the rating agency)
Fitch Ratings has assigned Sri Lanka-based Softlogic Holdings PLC (SHL) a senior unsecured
rating of 'A-(lka)', and simultaneously assigned its proposed issue of redeemable debentures of
up to LKR750m an expected National Long-term 'A-(lka)(EXP)' rating. The final rating
is contingent upon final transaction documents conforming to information already
The debenture issue is expected to have a tenor of three years, with fixed-rate
coupon payments, and will help reduce SHL's exposure to interest rate risk. The
proceeds will be used to refinance existing short-term debt at SHL (holding
The senior unsecured rating and proposed debentures are rated in line with SHLs
National Long-Term Rating of 'A-(lka)', as they will rank equally with the
company's senior unsecured creditors.
KEY RATING DRIVERS
Strong healthcare segment: SHL's healthcare business, via its majority stake in
Asiri Hospitals Group, benefits from strong structural demand for private-sector
healthcare services in Sri Lanka across economic cycles and exhibits low
business risk. Robust demand for hospital service should help underpin an
increase of dividend income to SHL from Asiri Hospital Group in the medium-term.
Asiri Hospitals Group accounts for over 51% of SHL's consolidated EBITDAR in
9MFY13 (financial year ends March).
High structural subordination: As a holding company, SHL is dependent on
dividend income from its core operating assets to service its own obligations.
Therefore SHL's creditors are structurally subordinated to creditors at its
operating assets. Furthermore, Fitch does not expect SHL's leisure-sector assets
to upstream dividends until at least 2015 when these assets start generating
meaningful cashflows. SHL expects that dividend income from operating assets
will increase in 2014, reflecting higher distributions from Asiri Hospitals
Cyclical IT and retail: SHL's information technology segment, which primarily
consists of the distributorship for Nokia phones and Dell computers in Sri
Lanka, experienced margin decline in FY12. This is primarily due to a revised
pricing strategy within this segment which the management expects will reduce
the sizeable domestic grey market for such hardware.
Highly leveraged: Financial leverage at the SHL holding company level is
projected to increase to around 5.15x at FYE13 compared with 3.8x at FYE12,
largely due to a debt-funded capital injection into SHL's financial services
segment during the period, as well as the transfer of part of SHL's
indirect-ownership in Asiri Hospitals Group directly under SHL. Weaker
performance in SHL's IT segment and subsequently lower dividends to SHL was also
a driving factor, mainly due to inflationary cost pressures in 9MFY13. Fitch
expects financial leverage at SHL's holding-company level to reduce to below
3.5x by FYE14, based on higher dividend income expected from the healthcare
segment over the medium-term, and also because of LKR1.375bn of cash SHL will
receive from a part-divestment in March 2013 of its life insurance subsidiary.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
-Financial leverage at the holding company of above 3.5x on a sustained basis.
-A structural weakening of the credit profiles of SHL's key dividend income
contributing subsidiaries, including a sustained increase in financial leverage
at Asiri Hospitals Group above 3.0x (9MFY13: 2.8x annualised). Fitch expects
revenues and profits of Asiri Hospitals Group to improve over the medium-term,
which is likely to support lower financial leverage.
-SHL group's EBTIDAR/interest expense + operating lease rent (excluding interest
costs at its licensed finance company) falling below 1.25x on a sustained basis
(end-9MFY13: 1.33x). SHL has long-term credit lines to fund its new leisure
projects with grace periods on capital repayment, which limits its medium-term
debt-servicing burden to an extent. Howeve,r SHL will be required to continue
servicing interest on these loans, as well as its long-term lease rentals
elsewhere within the group. It has low headroom at the current rating level in
the event of an external shock.
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
-Holding company financial leverage falling below 2.5x on a sustained basis and
dividends from Asiri Hospitals Group increasing to over 50% of the total
dividend income to the holding company. However, as leverage is likely to be
5.15x at FYE13, Fitch does not expect positive rating action over the next 12 to
Further details on SHL are available on www.fitchratings.com and