Corporate sector deleveraging hits a snag amid soaring rates; asset disposal deals delayed   

The deleveraging exercise of Lankan corporates has hit a snag after interest rates rose sharply amid the economy’s collapsing, casting a long shadow on those who were planning to divest part of their assets to cut debt.
Companies took on more debt and became leveraged during the two years of the pandemic making the most of the historically low interest rates. But, the situation took a wild turn from April onwards when the Central Bank delivered a bumper rate hike to stem the brewing price pressures in the economy. 

Some companies carried out even leveraged buyouts of smaller companies, as money was cheaper then and thus it made more sense for them to borrow to buy other companies. 

However, when these companies want to shed some of that debt which they have accumulated, they would now find difficult to do that amid soaring interest rates, which is hostile to corporate deals such as divestitures. 
Janashakthi Limited is one such company as their leverage, measured through net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) remains elevated, and ICRA Lanka Limited said their asset disposal and asset monetisation plans could get delayed due to the challenging market outlook. 

The holding company of Janashakthi Insurance PLC and First Capital Holdings PLC had net debts of Rs.17.6 billion by the end of March 2022 compared to Rs.16.7 billion a year ago with its leverage ratio rising to 15.9 times from 15.4 times during the year. 

“The company is primarily dependent on asset disposals for its debt repayments, and has thus been rolling over its principal repayments,” the rating agency said, affirming the company’s rating at BB+ with a Negative outlook a few days ago. 

Meanwhile, interest cover of the company, a measure of debt serviceability, stood at 0.6 times its EBITDA in the last financial year, reflecting that its finance cost remains higher than its EBITDA. 

Hence, the rising interest rates could further pressure the ratio and limit its debt serviceability. 

“The net finance cost was reported at about Rs. 1.6 bn as in FY2022 and FY2021. ICRA Lanka expects the finance cost to significantly increase in FY2023, as the incremental cost of funds has increased with the sharp increase in systemic interest rates,” the rating agency said. 

Janashakthi Limited with assets of Rs.27.9 billion reported a total operating income of Rs.1,291 million in the FY2022 with an after tax loss of Rs.521 million. The company depends primarily on the dividends incomes from its subsidiaries. 

However, the company’s long standing relationships with banks and financial institutions could provide some support in refinancing its debt, the rating agency said.