Fitch Ratings has revised the Outlook on consumer-durables retailer Singer (Sri Lanka) PLC’s National Long-Term Rating to Negative from Stable. Fitch has simultaneously affirmed the National Long-Term Rating at ‘A-(lka)’ as well as the ‘A-(lka)’ rating on Singer’s outstanding senior unsecured debentures and ‘F2(lka)’ National Short-Term Rating on its commercial paper.
Difficulty in Reducing Leverage: The Negative Outlook reflects the challenges Singer may face in reducing its leverage, defined as net adjusted debt/EBITDAR, to below 5.5x - the level at which we would consider negative rating action - by the financial year ending March 2021 (FY21), from 6.1x in the trailing 12 months to end-June 2019 and 6.4x at FYE19.
The ban on Huawei Technologies by the US authorities is likely to weaken Singer’s mobile phone sales from a high of around 25% of revenue in FY19. Singer will aim to diversify sales across other brands if the ban continues, but the efficacy of its strategy remains to be seen. It also plans to cut operating costs in the next two years, but this is subject to execution risk.
Leverage fell in the year ending June 2019 following the removal of cash margin requirements on imports in mid-March 2019.
This saw the resumption of Singer’s supplier credit cycle, with a cash inflow of LKR750 million from improved creditor days in 1QFY20. The cash margin was introduced in November 2018 to discourage imports in a bid to combat pressure on the local exchange rate.
The company had to increase debt and incur higher interest costs to fund the cash margin requirement so long as letters-of-credit remained unpaid.
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