October, 2, 2014
Fitch Ratings has downgraded Softlogic Holdings Plc's (SHL) National Long-Term Rating to 'BBB-(lka)' from 'BBB+(lka)'. Fitch has also downgraded the National Long-Term Rating on SHL's senior unsecured redeemable debentures to 'BBB-(lka)' from 'BBB+(lka)'. The ratings have been placed on Rating Watch Negative (RWN).
The two-notch downgrade reflects the aggressive investments and capital structure and the weaknesses in SHL's liquidity profile and financial metrics which are not considered appropriate for its previous 'BBB+(lka)' ratings.
The maintenance of the 'BBB-(lka)' ratings are subject to SHL adequately addressing its liquidity, capital structure and financial flexibility; this is reflected by the placement of the ratings on RWN.
KEY RATING DRIVERS
Materially Weaker Credit Metrics: SHL's leverage (defined as total adjusted debt net of cash / operating EBITDAR) and interest coverage of 8.2x and 0.9x respectively at FY14 (ending March 2014; FY13: 5.3x and 1.0x, FY12: 3.8x and 2x respectively) are materially weaker than Fitch's earlier expectations, which also takes into account some meaningful improvement in the total indebtedness from monetisation of certain assets of the group, as guided by the company. SHL's recent acquisition of a 45% stake of Odel PLC, as announced on 11 September 2014, is expected to further increase its debt levels, at least in the near-term.
Weakened Liquidity Profile: SHL is currently exposed to a high level of short-term debt. Debt amounting to LKR5.3bn (at end June 2014), comprising mainly of commercial paper (LKR3.9bn), is due to mature in one year. SHL appears to have good access to bank loans and benefits from a reasonable level of unencumbered assets, mainly consisting of unpledged shares of subsidiaries in the healthcare and financial services sectors. As part of its debt re- organisation plan, SHL expects to refinance the short-term debt with longer-term loans and re-pay some debt using cash flows from the monetisation of certain assets.
Future developments that may individually or collectively lead to a resolution of the RWN
-Rating Watch Negative will be resolved when SHL sufficiently addresses its near-term refinancing requirements. The failure to address this concern sufficiently and in a timely manner may result in further negative rating action.
-On resolution of the Rating Watch, Fitch will consider SHL's debt servicing capability (including interest coverage based on sustainable cash flows to SHL from its investments), debt structure and liquidity, including the level of financial flexibility based on the un-encumbered assets of the company in determining the appropriate rating and Outlook.