Fitch downgrades Sierra Cables’ rating on coronavirus risks

• Says another downgrade possible if the firm’s liquidity weakens further 

Fitch Ratings has downgraded Sri Lanka-based cable manufacturer Sierra Cables PLC’s National Long-Term Rating amidst expected sharp revenue declines and tight liquidity conditions due to COVID-19 impacts. 

Accordingly, Fitch Ratings has downgraded Sierra Cables PLC’s National Long-Term Rating to ‘BB(lka)’ from ‘BB+(lka)’ and placed the ratings on Rating Watch Negative (RWN).

Fitch forecast that the firm’s EBITDA could fall by 50 percent YoY to Rs.300 million with revenue declining by 38 percent YoY to Rs.3.6 billion
“We do not expect operating conditions to normalise to pre-pandemic levels for at least 12-18 months, as state and private-sector funded infrastructure projects will be deferred and liquidity pressure will increase among construction companies, which are Sierra’s debtors,” Fitch Ratings stated. 

Consequently, Fitch noted that Sierra’s liquidity could weaken significantly in the near term, with around Rs.150 million of cash at end-2019 (3QFY20) to meet debt maturities of around Rs.1 billion in the next 12 months.
With most of the maturities being working capital loans from banks, Fitch believe these maturities would be rolled over given the temporary nature of the current slowdown. 

However, it noted that working capital could be pressured further in a prolonged downturn and may lead to difficulty in obtaining bank funding to make up for cash-flow shortfalls.

Sierra stated that their bankers agreed to extend the principal due on term loans, amounting to around Rs.250 million in 2H20, if interest is being serviced, which supports near-term liquidity.

“Another negative rating action may be warranted if Sierra’s liquidity weakens further,” Fitch Ratings said.
Even after the current lockdown is eased, Fitch expects that the economic impact from the pandemic to continue to affect both domestic spending and investments, which drive construction activity.

“Existing projects will likely face cash-flow constraints as financial institutions may adopt a cautious approach in increasing exposure to this highly cyclical sector,” it pointed out. 

The rating agency forecast that Sierra’s projects segment as well as retail-oriented dealer market would decline by 40 percent YoY and 38 percent YoY respectively. 

Fitch expects that new public infrastructure projects to likely to be deferred at least in the next six to 12 months, with significant delays in making payments for on-going projects.

Sierra generates around 40percent of its revenue from government-related projects with the Ceylon Electricity Board (AA+(lka)/Negative)—an essential client.