Tuesday, 21 April 2015 00:54
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Fitch Ratings has assigned Singer Sri Lanka PLC’s (Singer; A(lka)/Stable) proposed unsecured redeemable debenture issue of up to LKR3bn a National Long-Term Rating of ‘A-(lka)(EXP)’. The debentures are likely to have a three-year tenor and to be issued in two tranches with fixed and floating rates. The proceeds of the proposed issue will be used as working capital and used to refinance existing debt.
The debentures are rated at the same level as Singer’s National Long-Term Rating of ‘A-(lka)’ because they represent senior unsecured obligations of the company and would rank equally with the company’s other senior unsecured debt. The final rating is subject to the receipt of final documents conforming to information already received.
Key rating drivers
Strong market share: Singer’s position as a leading consumer durables retailer is supported by its extensive distribution network, multi-brand strategy, and robust after-sales service. Singer’s extensive reach of over 1,000 outlets is important given its mass market focus; this includes 414 exclusive Singer showrooms. Singer retails a range of products across a number of brands and price points, including its well-known, competitively priced in-house brands, Singer and Sisil, which account for over half of Singer’s consumer durable revenue.
Improved operating environment: Consumer durable sales rose 14.4% in 2014, following a 0.6% decline in 2013, due to an improvement in demand. Electricity tariff and fuel price reductions implemented in late 2014, low interest rates and a relatively stable exchange rate environment have also supported better consumer durable demand. Fitch expects initiatives announced in the Government’s Interim Budget in February 2015 to sustain this trend. These measures include higher salaries and allowances for public-sector employees (who form about 25% of households), and a further reduction in fuel prices in line with market pricing.
Cyclical demand and currency risk: The discretionary nature of consumer durables makes demand volatile across business cycles. Singer is also vulnerable to exchange rate risk because a range of its products are imported. Singer locally produces and procures close to 35% of its products from related companies and local suppliers, which mitigates this risk.
Well-managed consumer loans: In-house financing accounted for around 40% of Singer’s sales in 2014 and is important given Singer’s mass market positioning. In-house financing makes products available to individuals who may otherwise have limited access to credit. The portfolio of loans is well-managed, with average duration of less than a year, average loan-to-value ratio of 85%, while staff are strongly incentivised to recover debts. At end-2014, overdue accounts stood at 4.4% of the portfolio (2013: 3.7%), while write-offs remain negligible.
Key assumptions
Fitch’s key assumptions within our rating case for the issuer include:
Revenue to increase due to improved consumer purchasing power.
Margins to improve gradually as a benign demand environment lowers competitive pricing pressure.
No material capex as Singer consolidates its store network.
Rating sensitivities
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
A sustained increase in Singer’s leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (2014: 4.72x)
EBITDA margin sustained below 7% (2014: 7.5%)
A material weakening in Singer’s (company-level) liquidity profile
A material weakening of the credit profile of Singer’s 80% subsidiary, Singer Finance (Lanka) PLC (BBB+(lka)/Stable), given strong linkages between the entities
Positive: Future developments that may individually or collectively lead to a positive rating action include:
Singer’s leverage falling below 4.5x on a sustained basis
