Hayleys takes a hit

Placed on RWN by Fitch due to Alumex acquisition

Fitch Ratings Lanka yesterday placed Hayleys PLC’s (Hayleys) National Long-term rating of ‘AA-(lka)’ on Rating Watch Negative (RWN).

This follows Hayleys group’s announcement on 4 November 2010 of its acquisition of Alumex group for Rs. 2.2 b, of which Rs. 2 b was funded using debt facilities at its holding company – Hayleys PLC.

The assignment of RWN reflects Fitch’s view that Hayleys’ rating could be downgraded or affirmed over the near-term, subject to the review of further material information. The RWN reflects Fitch’s concern that based on the increase in debt, Hayleys’ leverage (total adjusted net debt/EBITDAR) rising to a level no longer commensurate with the current ratings. As of 30 September 2010 (H111), Hayleys’ total debt at holding company was Rs. 2.1 b and its leverage was 3.5x. The Alumex acquisition’s debt funding of Rs. 2 b will deteriorate this leverage level significantly.

The rating could be downgraded immediately, if it emerges that Hayleys is unable to maintain leverage closer to pre-acquisition levels as a result of certain planned measures that the management expect to implement over the near-term.  Fitch had in its earlier announcement on 30 May 2010 highlighted that an increase in indebtedness at the Hayleys’ holding company level – due to any future investments with limited control over dividend policy or long payback periods – could result in negative pressure on Hayleys’ ratings.

Fitch also highlights that proposed plans at Hayleys’ newly announced wind power project as well as expected refurbishment plans at Ceylon Continental Hotel in Colombo city will increase indebtedness at the group level and are concerns for its rating. These also include the fact that based on H111 figures, Hayleys’ hand protection, fibre and textile segments are currently stressed.

Therefore, the agency notes that the group’s better performing segments such as transportation, agri-inputs and plantations will be required to increase their dividend contributions to the holding company to maintain appropriate leverage and coverage.

Additionally, Fitch will also re-evaluate Hayleys’ debt service coverage (as measured by interest and principal payments to funds from operations) at holding company at its sustainable level over the medium-term, based on newly increased interest and capital repayments levels, as well as offsetting expected future cash inflows.

Fitch will seek to resolve the RWN on further guidance from Hayleys’ management over the coming days.