Fitch Ratings has assigned Abans Plc's proposed issue of senior unsecured redeemable debentures of up to LKR2bn an expected National Long-Term rating of 'BBB+(lka)(EXP)'. The rating is contingent upon the final transaction documents conforming to information already received.

The proposed debentures are rated in line with the Sri Lanka-based retailer's National Long- Term Rating of 'BBB+(lka)', as they will rank equally with the company's other senior unsecured creditors.

The debenture is expected to be issued in three tranches with maturities of three, four, and five years at fixed coupon rates. The proceeds will be used to re-finance part of the company's short-term borrowings and will help to reduce Abans' exposure to refinancing- and interest rate risk.

KEY RATING DRIVERS

Weakening Credit Metrics: Abans' net leverage, as measured by adjusted net debt/EBITDAR (excluding finance subsidiary Abans Finance Plc), increased to 8.05x in the financial year ended 31 March 2014 (FY14) from 5.25x in FY13. Abans' fixed-charge coverage (EBITDAR/gross interest + rent, excluding finance subsidiary Abans Finance Plc) deteriorated to 0.82x in FY14 from 1.34x in FY13. The deterioration was mainly due to EBITDAR margin (excluding Abans Finance Plc) contracting to 6.5% in FY14 from 9.2% in FY13 because of subdued demand, intense competition and a shift towards lower margin products. Although the company has plans to reduce its debt, Fitch expects Abans' leverage to remain above 4.5x in the medium term due to a weak recovery in EBITDAR margins.

Leading Consumer Durable Retailer: Abans is one of the leading retailers of consumer durables in Sri Lanka, and it has a strong brand portfolio and extensive distribution network. Abans' revenues are supported by its in-house hire-purchase operations, which contributed to 40% of revenue in FY14. Abans' hire-purchase book is prudently managed with higher down payment requirements and an efficiently and closely monitored recovery system, which has helped the company maintain a low delinquency rate.

Real Estate Project Risk: Abans' investment in a mixed-use development called Colombo City Centre will be capped at LKR1.9bn, most of which was incurred in FY14. Even though the equity contribution is capped, any delay in debt funding or pre-sales of the project could result in further capital calls for Abans. Furthermore, any delays to construction, which is due to run from FY15-FY17 could increase the business risk for Abans. Abans is undertaking the project, which has retail, hotel, and apartment components, with Singapore-based Silver Needle Hospitality.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

- A sustained increase in Abans' adjusted net debt/EBITDAR excluding Abans Finance Plc to over 5.5x

- Fixed-charge coverage reducing below 1.25x on a sustained basis

- A material delay in progress on the Colombo City Centre project or additional capital calls for the project

- Any delay in the scheduled repayments from related parties.

Positive: No positive rating action is expected given that the rating is on Negative Outlook. However, future developments that may individually or collectively lead to the Outlook being revised to Stable include:

- Smooth progress of the Colombo City Centre project, which will limit Abans' financial liability to the initial investment value.

- Improvement in the retail environment as reflected in sustained improvement in EBITDAR margins above 7%