Lanka Rating Agency assigns A-/P2 corporate credit ratings to Softlogic Holdings

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Lanka Rating Agency (LRA) has assigned the long- and short-term corporate credit ratings of A- and P2 to be assigned to Softlogic Holdings PLC. Concurrently, LRA has also assigned an initial issue rating of A- to the company’s existing Rs. 1 billion rated, unsecured, redeemable debenture (2013/2016). All long-term ratings carry a stable outlook. Softlogic is a diversified conglomerate with interests in healthcare, ICT, retail, financial services, automobile and leisure. The company and its subsidiaries are collectively referred to as the Group. The ratings are upheld by the Group’s well-diversified business interests, as the Group has diversified into the retail, ICT, leisure, healthcare, financial services and automobile industries. In 2006, Softlogic entered the retail sector with the acquisition of Uni Walkers Ltd., while in 2010, Softlogic strengthened its presence in the private healthcare market segment of the country when it consolidated Asiri Hospital Holdings, as a subsidiary. During this period, Softlogic also initiated its presence in the financial services market of the country through the acquisition of Capital Reach Holdings which was subsequently renamed as Softlogic Capital PLC. Softlogic’s revenue contributions are accounted for by its four major segments with no major reliance of any segment to drive top line growth. The healthcare, retail, ICT and financial services subsidiaries of the Group contributed almost equally to the Group’s top line, with none of them accounting for more than 30% of the Group’s total revenue in 31 FYE March 2014 and FY Mar 2013. Softlogic’s ratings are also upheld by the Group’s presence in the healthcare segment, driven by the Group’s acquisition of Asiri, Sri Lanka’s largest private healthcare provider, in 2006. Asiri’s revenues continued its upward trend, even though its revenue growth has slowed down compared to previous years, pressured by intense competition. However, Asiri’s performance continued to compare higher against its other industry peers as it continued to dominate the country’s private healthcare industry with its state-of-the-art medical investments and upgrading of its facilities. Asiri remained as the Group’s primary top and bottom line contributor with its revenue contributions as a percentage of the Group’s total revenue amounting to 27.32% while also contributing to 70.24% of the Group’s total operating profits in FY Mar 2014 (FY Mar 2013: 82.32%). The Group’s ratings are further strengthened by its robust retail segment, which was further strengthened by its recent acquisition of Odel PLC (Odel), a strong local fashion brand. Softlogic Retail Ltd., the retail arm which is Softlogic’s second largest top line contributor, with its revenue contributions amounting to 25.68% of Softlogic’s total revenue in FY Mar 2014 (FY Mar 2013: 22.27%), whilst its operating profits accounted for 24.93% of the Group’s total operating profits over the same period (FY Mar 2013: 30.44%). SRL has grown exponentially in the branded apparel, accessories and consumer durable market segment over the past few years and covers close to 18 clothing, footwear and accessory brands and 176 retail stores. Furthermore, SRL’s potential for growth was strengthened further with the Group’s acquisition of a 45.16% stake in Odel, one of the largest retail chains in the country. The above positives are moderated by the Group’s total borrowings which are considered high, reflective of the Group’s aggressive expansionary strategy which has resulted in considerable investment requirements which needed to be serviced by debt issuance. Softlogic expanded rapidly post the acquisition of Asiri, by expanding in retail and financial services sectors. In addition to this, Softlogic has also forayed into several capital intensive business segments such as leisure and healthcare, resulting in an increase in the Group’s total borrowing as at end-FY Mar 2014. Consequently, Softlogic’s gearing ratio increased to 2.36 times (2.23 times, excluding cash and cash equivalents) in FY Mar 2014 from 1.70 times in FY Mar 2013 (1.60 times, excluding cash and cash equivalents). Softlogic’s ratings are also moderated by the risks pertaining to Softlogic’s other subsidiaries. Even though the ICT segment was one of the Group’s substantial revenue contributor, its segmental revenue dipped by a marginal 4.80% y-o-y to Rs. 5.98 billion in FY Mar 2014 from Rs. 6.28 billion in FY March 2013. LRA also notes that contribution from Softlogic’s other subsidiaries apart from its four major segments have remained miniscule at present. Although, going forward, contributions are expected to increase from the Group’s previously dormant and partially active sectors.

Fitch downgrades Softlogic Holdings to BBB-; places on Rating Watch Negative

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 Rs. 5.3 b (at end June 2014), comprising mainly of commercial paper (Rs. 3.9 b), 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. Rating sensitivities 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.