Fitch rates Abans’s Rs. 250 m Commercial Paper ‘F2’

Fitch Ratings has assigned Sri Lanka’s Abans Limited’s (Abans, ‘A-(lka)/Stable’) commercial paper (CP) issue of up to Rs. 250 m a National Short-Term rating of ‘F2(lka)’.

The issue has a tenure of up to three months, and will be used to fund the company’s working capital requirements. At end-September 2012, Abans’s cash reserves of Rs. 1.05 b covered 54% of outstanding CP and debentures maturing in less than one year.

Non-bank institutional investors account for the majority of Abans’ outstanding CP. Such investors are more likely to withdraw investments at short notice and could create liquidity risk for a borrower in the absence of dedicated liquidity backup lines (from banks) covering CP maturities.

In this respect, Abans has confirmed that on average about 80% of its CP is rolled over on maturity. This, combined with Abans’ access to domestic banks as one of Sri Lanka’s leading consumer durables retailers and its satisfactory balance sheet, mitigates liquidity risk.

Apart from CP’s, debentures, as well as deposits at its finance company subsidiary – Abans Finance PLC (AFP) – Abans also has short-term debt of Rs. 3.7 b consisting of import loans and credit lines from banks which carry low liquidity risk. This is because banks are likely to roll these over so long as the borrowers’ business- and financial-risks do not increase materially.

The Stable Outlook on Abans’s National Long-Term rating reflects Fitch’s view that the company is likely to maintain a satisfactory credit profile over the medium-term despite a slowing economy and higher inflation, underpinned by its strong market position in consumer durables in Sri Lanka.

What could trigger a rating action?

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

Consolidated lease-adjusted debt net of cash/operating EBITDAR (excluding debt at AFP) increasing to over 4.5x on a sustained basis (end-September 2012: 4.07x annualised)

A sustained weakening in Abans’s market share in domestic consumer durables retailing

sharper-than-expected deterioration in AFP’s credit profile leading to greater support or capital injections from Abans

Positive: The ratings are constrained at the current level by the group’s weak corporate governance, including the high level of related-party transactions with companies outside the Abans consolidated group.