Fitch Ratings-Colombo-29 July 2013: Fitch Ratings has revised Sri Lanka-based retailer Abans Limited's Outlook to Negative from Stable. The National Long-Term rating has been affirmed at 'A-(lka)'. The agency has also affirmed Abans's outstanding unsecured redeemable debentures at National Long-term 'A-(lka)', and its outstanding commercial paper at National Short-term 'F2(lka)'.
Key Rating Drivers
Higher leverage: The Negative Outlook reflects an increase in Abans's net leverage (lease-adjusted net debt/operating EBITDAR, excluding Abans Finance PLC) to 4.60x for the financial year ended March 2013 (FYE12: 2.67x), above the negative rating trigger of 4.5x. The increase was primarily due to higher debt incurred to fund Abans's share of its upcoming Colombo City Mall joint venture, as well as due to bridging finance extended to a new related company that houses what was once Abans's motorcycle retail business.
Abans may find it challenging to reduce leverage below 4.5x by FYE14 and beyond, even if the bridging-loan was repaid by the counterparty. This is because of an expected slower economy in FY14, leading to weaker sales and profitability in Abans's cyclical core business - consumer durables.
Project risks: Abans is a key investor in an upcoming residential and commercial real-estate development in Colombo. Management expects construction to take place between 2014 and 2016, while the payback period is likely to stretch out over a longer period. Abans expects its investment in this project to be limited to the initial equity outlay - most of which had been incurred in FYE13.
However, given the large scale of the project and the high-profile counterparties involved, Abans may face reputation risk if the project faces material delays or is stalled. Although several exit options may be available in such a stressed scenario, Fitch does not rule out potential cash calls over the medium-to-long term. The agency expects there to be greater certainty on the project's progress over the next 12 - 24 months, and may take rating action if there is material adverse deviation from management's current expectations.
Strong market share: Abans is a leading consumer durables retailer in Sri Lanka, with strong brands and an extensive distribution network of 1,059 outlets, 439 of which are its own stores. Its LG brand accounts for a significant part of its sales. Over the last three to four years Abans's dependence on LG has reduced as its distribution broadens to include other brands such as HP, Haier, Toshiba, Philips, Whirlpool, and Sanyo.
Discretionary demand/currency risk: Abans is exposed to discretionary demand for consumer durables, which tends to fluctuate through business cycles, reflecting the non-essential nature of products. This is an inherent business risk for the company and is factored into its 'A-(lka)' rating Furthermore, Abans imports over 80% of its products for retail domestically, which exposes the company to foreign currency risk. This risk is partly offset Abans assembling nearly 20% of its sales domestically.
Evolving corporate governance: During FY13 Abans has taken measures to improve its weak corporate governance, including by bringing in Directors from outside the Pestonjee family (who owns the majority of Abans' shares), divesting non-core entities from the Abans group, and reducing related-party transactions with unconsolidated companies. Fitch will monitor developments over the medium term and look for tangible benefits before considering whether these measures have a material impact on Abans' risk-profile.
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. Additionally Fitch expects Abans's free cash flow (FCF, defined as operating cash after dividends and capex) to remain negative in FY14 on account of the working capital-intensive nature of the retail business, which will require a further increase in borrowings. Fitch takes some comfort from the strength of Abans's core business and its access to domestic banks.
Negative: Future developments that may individually, or collectively, lead to a further negative rating action include:
-Leverage being sustained over 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's financial liability to the initial investment value.
Additional information is available at www.fitchratings.com and www.fitchratings.lk