Fitch Ratings-Colombo/Seoul/Singapore-26 October 2012: Fitch Ratings has assigned Sri Lanka-based diversified services company, Softlogic Holdings PLC (SHL), a National Long-Term 'A-(lka)' rating. The Rating Outlook is Stable.
The rating reflects the strong market position of SHL's healthcare business, and Fitch's expectations that dividend income from this segment will increase in the medium term. However, this strength is counterbalanced by structural subordination of SHL's creditors to its key dividend-paying subsidiaries and by the current high proportion of dividends from cyclical sectors.
SHL's healthcare business - Asiri Hospital Holdings PLC (Asiri) - has the highest market share by revenue among domestic private-sector hospitals, a position that Fitch expects will be maintained over the medium term. Asiri had mostly negative free cash flow (FCF, defined as net operating cash generated after capex and dividends) over the four years to March 2012 (FY12) owing to high capex. However with capex tapering off from FY13, Fitch expects Asiri to generate positive FCF, resulting in lower net debt.
Fitch expects dividend income from SHL's healthcare segment to increasingly account for a greater share of SHL's earnings (FY12: 16%), given its market leadership and strong structural demand for healthcare services in Sri Lanka. At present, SHL's retail and information and communication technology (ICT) segments are significant dividend contributors (FY12: 41%). However, earnings from these segments are more susceptible to economic cycles, which is an inherent business risk for SHL.
As a holding company (HoldCo), 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 of its operating assets. Structural subordination of HoldCo creditors can increase if SHL's effective control of a subsidiary reduces, or if the subsidiary's financial leverage (defined as total debt including off-balance sheet items net of cash/operating EBITDAR) increases. Fitch expects that structural subordination from SHL's healthcare business will reduce in the medium term as a major portion of its long-term debt is paid off.
SHL has demonstrated a large appetite for debt-funded acquisitions in the past. However, Fitch takes comfort from a capital injection of over LKR4bn during FY12 that helped reduce HoldCo financial leverage to 3.3x at FYE12, and management's intentions to consolidate SHL's investments within the current business segments in the medium term.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
-HoldCo financial leverage increasing above 3.5x on a sustained basis
-A structural weakening of credit profiles of SHL's key dividend income contributors, including a sustained increase in financial leverage at Asiri above 3.0x (FY12: 3.0x)
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
-HoldCo financial leverage falling below 2.5x on a sustained basis
-Dividends from Asiri to SHL increasing to over 50% of total dividend income at the HoldCo, while maintaining financial leverage at Asiri below 3.0x