Fitch says Singer rating unaffected; Hayleys’ balance sheet will be stretched significantly

Thursday, 21 September 2017 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings said yesterday Hayleys PLC’s acquisition of a controlling stake in Singer (Sri Lanka) PLC (Singer, A-(lka)/Stable) is neutral for Singer’s rating.

This is because Hayleys’ balance sheet will be stretched significantly following the completion of the Singer acquisition despite Hayleys’ stronger business risk profile as the purchase is likely to be largely funded by debt and existing cash. In Fitch’s view, this is likely to limit Hayleys’ ability to provide extraordinary support to Singer if required, especially given the size of Singer’s own balance sheet and its significant debt.

On 15th September 2017, Hayleys purchased a 61.73% stake in Singer from its main shareholder Retail Holdings (Sri Lanka) BV for LKR10.9 billion. Retail Holdings will retain a stake of 9.47% for the time being while Hayleys will make a mandatory offer as required by local regulations to purchase the remaining 28.8% of Singer.

“We estimate that following Hayleys’ acquisition of the 61.73% of Singer, Hayleys’ consolidated lease-adjusted debt net of cash/operating EBITDAR of 3.9x as at end-March 2017 (FY17) will increase to 5.8x, all else remaining equal. Hayleys’ leverage could increase further depending on the use of more debt to fund the remaining stake in Singer following the completion of the mandatory offer,” Fitch said.

It estimates that Hayleys’ financial flexibility will be stretched even further at the stand-alone company level through which a bulk of the investment in Singer will be made.

With the acquisition, Singer, the biggest consumer-durable retailer in the country, will become Hayleys’ largest subsidiary, contributing an estimated 23% of the Hayleys group’s post-acquisition pro-forma consolidated EBITDA. Hayleys’ other significant operating segments include transportation and logistics, purification and agriculture, whose contribution to Hayleys’ post-acquisition pro-forma consolidated EBITDA will drop to approximately 13%, 11% and 10%, respectively, according to Fitch’s estimates, with all else being equal.

Fitch also does not currently expect Singer to benefit from any significant operational synergies from being part of the larger Hayleys group. “We do not believe there will be additional pressure for higher dividend upstreaming from Singer to its new parent as Singer’s average dividend payout has been above 60% in the past, which is materially higher than what we have seen with most of Hayleys’ subsidiaries,” Fitch added.