Higher borrowing costs will hurt Sri Lankan companies: Fitch
ECONOMYNEXT – Rising domestic interest rates will hurt Sri Lankan corporates over the next 12 months, with about half the debt at variable rates, and retailers like Singer and Abans the most affected, Fitch Ratings has said.
“Fitch does not expect the pressure on interest rates to ease in the near term owing to rising inflationary pressures and weak external finances,” the rating agency said in a statement.
Annual inflation as measured by the Colombo consumer price index rose to 8.4 percent in April 2017 from 4.3 percent a year ago.
Corporate borrowing costs have increased more than 200bp in the 12 months to March 2017 as the Central Bank of Sri Lanka increased policy rates by 125bp and the statutory reserve ratio by 150bp in an attempt to reign in aggressive credit growth, Fitch Ratings said.
“We have assumed that 100 percent of corporates’ short-term debt and 40 percent of long-term debt will be re-priced at higher rates immediately,” the rating agency said.
Most of the long-term debt stems from banks, and around half of such debt are at a variable interest rate.
Fitch Ratings said that, as of end-March 2017, almost half of the outstanding borrowings of companies it rates consisted of short-term borrowings, primarily funding working capital, exposing the companies to modest interest-rate risk at the point of refinancing.
Only 12 percent of outstanding borrowings of Fitch-rated corporates consisted of debenture financing, which is predominantly on fixed rates.
“Corporates with high short-term working capital requirements such as retail and manufacturing companies are hurt the most by the recent rate increases,” Fitch Ratings said.
In Fitch’s view, the two large consumer durable retailers, Singer (Sri Lanka) PLC, with an A-(lka) rating and stable outlook, and Abans PLC, rated BBB+ with a stable outlook, are the most affected of the entities it rates.
This was because most of their borrowings consist of short-term working capital financing and will have to be rolled over at higher rates.
“Furthermore, both companies realise 30-40 percent of their sales through hire purchase schemes, which can meaningfully weaken with rising interest rates and slow EBITDA growth,” Fitch Ratings said. “Fitch believes Singer has more headroom in its current rating to withstand these challenges compared with Abans.”
Kotagala Plantations PLC, with a CC(lka) rating, may also face further liquidity pressure on account of higher interest payments.
Fitch said it believes Hemas Holdings PLC (AA-(lka)/Stable) and Sunshine Holdings PLC (A(lka) to be the least affected due to their low refinancing requirements during the next 12 months.
Fitch said debt of companies it rates increased mostly on account of investments in new capacity in sectors such as retail and manufacturing, which may take longer to translate into meaningful cash flows.
(COLOMBO, June 20, 2017)