TEXT-Fitch cuts Hayleys PLC to ‘A+(lka)’/outlook negative


Wed Dec 28, 2011 4:02am EST

(The following statement was released by the rating agency)

Dec 28 – Fitch Ratings Lanka has downgraded Hayleys PLC’s National Long-Term
rating to ‘A+(lka)’ from ‘AA-(lka)’. The Outlook is Negative.

The downgrade reflects Hayleys’ increased appetite for financial leverage at the
holding company (HoldCo), 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.

Hayleys’ rating also factors in the heightened risk to the group’s cash flows
stemming from the weak economic outlook in its key export markets, the European
Union and North America (50% of FY11 (end-March 2011) revenue). However, Fitch
expects better performance in Hayleys’ consumer, agriculture, power, transport,
and leisure segments domestically to help offset export-oriented risks to an
extent.

The rating also factors in Fitch’s view that Hayleys may need to extend
financial support to its textile company – Hayleys MGT Knitting Mills PLC (HMGT,
‘BBB(lka)’/Negative, 57% direct-ownership), as the latter is undergoing a
restructuring process.

The rating will remain constrained over the medium-term due to Hayleys’ higher
appetite for financial leverage, the uncertainty stemming from weak demand in
the company’s key export markets, and the uncertainty surrounding the final
outcome of HMGT’s restructuring process.

The 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 annualized 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.

As a holding company, Hayleys’ rating factors in the business strength of, and
diverse dividend income from, its key operating subsidiaries. Hayleys exercises
control over its key subsidiaries, reducing the structural subordination of
HoldCo creditors to an extent. Hayleys’ group operating cash flows are also more
susceptible to commodity prices fluctuations, weather patterns, and foreign
currency risks. At FY11, 63% of group revenues were derived from exports, while
most of its production is based in Sri Lanka.

The group’s revenue grew by +43% yoy to LKR54.2bn in FY11, and by +37% yoy when
new acquisitions in construction and leisure are excluded, as most segments’
revenues rebounded post the global credit crisis. However, the group’s operating
EBITDAR margin contracted to 7.4% from 10.6% during the same period, mainly due
to HMGT’s weaker performance, lower profitability of some of its new
acquisitions, and higher prices paid for, and supply shortages of, key
production inputs in other key segments. Fitch expects demand pressures from key
export markets to constrain profitability, at least through 2012.

Hayleys’ liquidity position within most key operating subsidiaries is adequate,
with largely manageable near-term debt maturities covered by healthy operating
cash flows or strong access to local banks. The latter along with managements’
near-term measures to reduce financial leverage supports the weak liquidity at
HoldCo, which is evidenced by its near-term maturities of LKR2.3bn at
end-September 2011, compared with LKR25m in cash reserves and LKR1bn of
unutilised credit lines.

Hayleys has been in operation for over 125 years, and has interests in over 140
companies, across 12 broad business segments. At end-November 2011, Mr K.D.D.
Perera, who has interests in financial services and manufacturing, controlled
nearly 48% of the group.

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