Half of Fitch-rated Lankan firms have little headroom to weather prolonged downturn

Almost half of the Fitch-rated companies in Sri Lanka are less likely to weather a prolonged economic downturn without facing a rating downgrade triggered by the currency weakness, higher leverage or liquidity squeeze with the latter being the most immediate.

In a report, which looked at those companies representing different sectors showed almost half of the Fitch-rated companies operate in sectors that have moderate or high level of exposure to the effects of the coronavirus pandemic. 

But what amplifies their risk is that they have only low or moderate rating headroom to weather a prolonged downturn such as this.

Businesses remain shuttered since mid-March in a bid to contain the spread of the deadly virus and even those few operating under the essential list are also facing obstacles in the supply chain and demand is largely muted due to the lockdowns and weak incomes.  

Fitch has the largest number of companies, which has a rating in Sri Lanka. 

In an analysis done on the companies on how close they were to breaching their negative rating sensitivities prior to the pandemic, it has shown that companies with limited rating headroom to withstand Fitch’s base case assumptions or a more prolonged disruption could be subject to negative rating action, should the rating agency expect rating sensitivities to be breached for a sustained period. 

“Corporates facing liquidity pressure could also see some stress on their ratings,” Fitch cautioned. 

Fitch Rating’s analysis identified companies in consumer retail, construction and hotels as the most affected from the pandemic while utilities, telecoms and healthcare among the sectors with the least affected. 

Fitch Ratings recently downgraded the consumer durables retailer Singer Sri Lanka and put Abans under negative outlook as it identified the sector as immediately affected by the store closures, import restrictions and sour discretionary demand weighing on the companies’ liquidity and leverage.  

It also downgraded the cable maker, Sierra Cables, as the delay in construction projects could weigh on the company’s cash flows.

Meanwhile, the rating agency identified hotels and export-oriented manufacturing among hardest hit sectors from the pandemic. 

However, Fitch considers the risks facing some of the conglomerates, which are exposed to these sectors, to have relatively low risk, given their diversified operations. 

“ …. risks to the rated corporates exposed to these sectors – such as Melstacorp PLC and Distilleries Company PLC, Hemas Holdings PLC, Richard Pieris & Company PLC and DSI Samson Group Private Limited – are largely mitigated by the lower cash flow from these sectors (exposed sectors) due to their more diversified operations,” Fitch said. 

Both Melstacorp and Hemas have exposure to the hospitality sector while Richard Pieris and DSI Samson are in food and beverage and fast-moving consumer goods and footwear retail, respectively, which have less severe impact from the pandemic, “given the relatively defensive demand for these products even during periods of sharp economic slowdown.

“Periods when consumers are in lockdown should have an impact on demand for these products, while we believe demand will recover to normalised levels within a few quarters - depending on how soon the virus is contained and livelihoods are restored,” Fitch said. 

Meanwhile, the rating agency also observed that 60 percent of the companies with their ratings to have moderate to high exposure to the weakening of the local exchange rate as they heavily depend on imports for their inputs or for selling in the domestic market.

Meanwhile, Fitch identified utilities such as the Ceylon Electricity Board, telecom services providers such as Dialog Axiata and Sri Lanka Telecom and companies exposed to healthcare and pharmaceutical sectors such as Hemas and Sunshine Holdings as sectors which are least affected or largely neutral, given the essential nature of these services.