Singer Sri Lanka’s rating downgraded on likely increase in leverage

Fitch Ratings has downgraded Singer Sri Lanka PLC by a notch from A+ to BBB+ and left its outlook at ‘Negative’ as worries mount over the firm’s leverage amid disruptions to its business and the pressure on the discretionary spending of the consumers.

It is typical for the consumer durables sector to undergo a steeper slum compared to other sectors when the economy goes into a downturn and it also takes longer than the rest to make a recovery. Last week Mirror Business reported that consumer durables is among the worst-hit sectors of the COVID-19-induced economic shutdown and it is at least 12 to 18 months away from returning to pre-crisis levels. 

“The downgrade and Negative Outlook reflect the significant business interruption from the coronavirus pandemic and the likely implications of a downturn in discretionary consumer spending, which we expect to extend into early 2021,” Fitch said in its rating review on Singer.

Earlier Fitch affirmed Abans PLC BBB+ rating but revised the outlook to ‘Negative’ due to similar reasons. 
Fitch expects Singer’s sales to fall by as much as 60 percent in the three months to June 30 (1Q21) with the decline to moderate in the next three to four quarters. 

Fitch Ratings does not expect Singer’s top line to return to pre-crisis levels at least until the next financial year of the company. 

“Even when restrictions are lifted we believe the retail sector will continue to struggle due to loss of income and lower household wealth,” the rating agency said.

The earnings season for the companies to report their results for the three months ended in March 2020 has almost arrived and there could be a few companies reporting results from next week. 

The consumer durable sector’s revival is contingent on how soon the government will ease or lift its import restrictions on non-essential imports, which were placed in early April effective through end-June. 

Singer is Sri Lanka’s largest consumer durables retailer and it has stocks sufficient to stretch for three months, given the national lockdown and should therefore be sufficient to cover sales till mid-June 2020, Fitch said. 

However, consumer durable retailers typically import around 80 to 90 percent of the products they market and are likely to face supply-side disruptions, the rating agency warned. 

Fitch anticipates a sharp increase in Singer’s leverage to around 8.0x in the financial year ended March 2021 (FY21), from an estimated 5.6x in FY20, based on the projections that earnings before interest tax depreciation and amortisation (EBITDA) dropping to around Rs.2.0 billion after revue falls 36 percent to Rs.33. billion. 

“Leverage could improve to around 6.0x in FY22 assuming the pandemic is largely contained and top line recovers,” Fitch noted. 

Singer’s liquidity remains tight with cash balance of around Rs.1.0 billion by end-2019 to meet debt maturities of Rs.13 billion in the 12 months, most of them are working capital loans and banks have shown their willingness in previous downturns to rollover these maturities. 

Further, the company has Rs.10 billion worth of undrawn but uncommitted lines from banks to help manage liquidity while supplier credit could also be utilised to support near-term liquidity although this could be eroded if the disruptions continue longer than expected. 

“Heightened liquidity pressure in the next few quarters could lead to further negative rating action,” Fitch said.  
The rating agency does not expect extraordinary support from Singer’s parent Hayleys PLC, which owns 90.4 percent of the company.