Fitch to be fixed?

• Unhappy after questionable downgrade Hayleys fires letter; legal action next?
  
   

Rating agency Fitch is under fire for some  of its judgments and the latest to join the chorus is Hayleys Plc.

Seemingly disturbed by the downgrade from AA- to A+ with a negative outlook by Fitch, Hayleys has fired a letter expressing its reservations, the Daily FT learns.

The highly-respected diversified blue chip is said to be perturbed by the lack of transparency on the part of Fitch in its rating rationale and the alleged failure to reveal a manual with which it bases the evaluation.  Apart from the letter, other options explored by Hayleys Board include legal action against Fitch, although this speculation couldn’t be confirmed.

Fitch, however, justified its action saying that the downgrade reflects Hayleys increased appetite for financial leverage at the holding company as reflected in the company’s heightened use of borrowings in 2010 and 2011 to fund its three large acquisitions that have protracted payback periods.

The rating agency also warned that Hayleys’ Negative Outlook indicates that a further downgrade may occur if the company fails to reduce financial leverage (net debt/EBITDA) at HoldCo to below 3.5x in the near-term (as indicated by the management) from 9.1x at end-September 2011, based on annualised dividend inflows.

“Negative rating pressure may also occur if financial leverage at Hayleys’ key operating subsidiaries increases on a sustained basis, due to weaker-than-expected performance in end-markets, cost overruns in refurbishments, or higher debt-funded dividend payouts or acquisitions, among other factors,” Fitch said.

Hayleys, however, has questioned some of concerns flagged by Fitch.

This is not the first time Fitch has drawn the wrath of listed corporates. Early this year LOLC was unsettled when it was downgraded to A- from A with a Negative Outlook, whilst recently Union Bank’s Outlook was revised to Negative from Stable though reaffirming BB+ rating.

Interestingly contrary to Fitch action on both Hayleys and Union Bank, RAM has reaffirmed ratings of the two corporates and hadnt revised their outlook either.

Fitch reasoned the outlook revision on Union Bank’s operational risks, given the nature of its disparate IT systems, weak operational branch procedures, while loan growth was high at 56.5% in nine months ended September 2011 (9M11).

In 2002 September Fitch downgraded premier blue chip JKH to AA+ from Triple A over the latter’s increased leverage levels largely due to acquisition related debt. However three months later in December 2002 Fitch in an update said it had removed JKH from rating watch list and reaffirmed the Triple A rating, a status the premier blue chip has retained since.

Interestingly, in the case of both Hayleys and Union Bank, another rating agency RAM reaffirmed the ratings and outlook of the two corporates at the same time, though raising concerns similar to Fitch.

After Fitch’s rating action on 15 December, RAM a week later said it has reaffirmed the respective long- and short-term financial institution ratings of Union Bank of Colombo PLC at BBB and P3; the long-term rating has a stable outlook. It said the ratings are premised on the Group’s healthy capitalisation but tempered by its small stature, moderate asset quality, performance, funding and liquidity.

With regard to Hayleys RAM said it has assigned respective long- and short-term corporate credit ratings of AA- and P1 to Hayleys PLC; the long term rating has a stable outlook.

The ratings reflect the group’s diversified business portfolio, strong market positions in several key businesses and adequate debt-protection metrics. On the other hand, the ratings are moderated by the Group’s high debt levels, fragile liquidity and a few loss-making operations.

Apart from drawing corporate ire, Fitch also sparked concerns within the Ministry of Finance and Central Bank after a special Asia-Pacific Sovereign Credit Outlook report labelled Sri Lanka as the latest economy with highest-risk financial systems. This categorisation put Sri Lanka as the fourth Asia Pacific country in that league (the other three being Indonesia, Hong Kong and China) and among nine globally.

This warning by Fitch appears to be based on consistently high (over 30%) credit growth in the country though disregarding it was from a low base, in an environment of low interest rates and part of post-war rebound.

With Fitch’s labelling and the report getting wide publicity, Central Bank Governor Nivard Cabraal had gone public with his reservations, whilst the regulator has also verbally conveyed its sentiments to Fitch.