September 10, 2014 (LBO) - Sri Lanka's Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC's (Lion) National Long-Term rating at 'AA-(lka)' with a stable Outlook, Fitch said in a statement.
The full statement is reproduced below:-
The agency also affirmed the company's senior unsecured rating at 'AA-(lka)' and assigned an expected National Long-Term rating of 'AA-(lka)(EXP)' to Lion's proposed unsecured redeemable debentures of up to LKR2bn (USD15.4m).
Lion plans to use the proceeds from the proposed debenture issue to refinance short-term facilities. The proposed debentures are rated in line with Lion's National Long-Term Rating as they will rank equally with the company's other unsecured debt. Fitch will assign a final rating to the debenture subject to the receipt of final transaction documents conforming to information already received.
KEY RATING DRIVERS
High Leverage: Lion's leverage as measured by net adjusted debt/operating EBITDAR stood at 2.14x at the end of the 2014 financial year on 31 March 2013(end-FY13: 2.61x), and is expected to increase following the company's proposed acquisition of Millers Brewery Limited (MBL), including its trademarks, from Cargills (Ceylon) PLC (Cargills).
However, we expect leverage to reduce over the medium term due to improving profitability. The proposed acquisition, announced in June, is contingent on MBL settling all its liabilities.
The MBL acquisition follows Lion's extensive expansion of its production facility in Sri Lanka, which resulted in high debt over FY13 and FY14. Leverage was exacerbated by margin deterioration because Lion sold more costly imported beer in cans at the same price as its domestic output to meet demand.
Lion stopped the imports half way through FY14 following the completion of additional capacity.
Increased Production Capacity: The recent expansion of Lion's facility has almost doubled production capacity, which will allow Lion to meet additional demand without further significant debt-funded capex.
This will leave cash flows available to pay down debt.
In addition, the potential integration of MBL's production could enhance economies of scale.
Market Leadership: Lion is the leading domestic beer manufacturer with a significant share of beer produced in Sri Lanka in 2012 and 2013. Its flagship product is the Lion brand of beer. The proposed MBL acquisition will be favourable for Lion's business risk profile as it is expected to further increase Lion's share of domestic output and strengthen Lion's hold on beer production in the country.
The proposed acquisition will also bring new products such as MBL's Three Coins, Sando, and Grand Blonde brands, and give Lion access to Cargills' extensive retail chain.
High Regulatory Risk: Domestic producers of alcoholic beverages face frequent and large increases in alcohol tax, which encourages consumers to turn to illicit sources and impacts industry profitability.
The industry also faces restrictions on advertising and retail players, which benefit incumbent licensed players, such as Lion, which have already built up their distribution networks and established their brands.
RATING SENSITIVITIES
Negative: Future developments that may individually, or collectively, lead to negative rating action include:
- Leverage of over 2.0x on a sustained basis
- The rating could be downgraded if Lion is required to inject further cash or take on more liabilities to complete the acquisition.No positive rating action is expected over the next 24 months as leverage is likely to remain high. However, Future developments that may individually or collectively lead to a positive rating action include:
- Leverage of below 1.5x on a sustained basis.
The full statement is reproduced below:-
The agency also affirmed the company's senior unsecured rating at 'AA-(lka)' and assigned an expected National Long-Term rating of 'AA-(lka)(EXP)' to Lion's proposed unsecured redeemable debentures of up to LKR2bn (USD15.4m).
Lion plans to use the proceeds from the proposed debenture issue to refinance short-term facilities. The proposed debentures are rated in line with Lion's National Long-Term Rating as they will rank equally with the company's other unsecured debt. Fitch will assign a final rating to the debenture subject to the receipt of final transaction documents conforming to information already received.
KEY RATING DRIVERS
High Leverage: Lion's leverage as measured by net adjusted debt/operating EBITDAR stood at 2.14x at the end of the 2014 financial year on 31 March 2013(end-FY13: 2.61x), and is expected to increase following the company's proposed acquisition of Millers Brewery Limited (MBL), including its trademarks, from Cargills (Ceylon) PLC (Cargills).
However, we expect leverage to reduce over the medium term due to improving profitability. The proposed acquisition, announced in June, is contingent on MBL settling all its liabilities.
The MBL acquisition follows Lion's extensive expansion of its production facility in Sri Lanka, which resulted in high debt over FY13 and FY14. Leverage was exacerbated by margin deterioration because Lion sold more costly imported beer in cans at the same price as its domestic output to meet demand.
Lion stopped the imports half way through FY14 following the completion of additional capacity.
Increased Production Capacity: The recent expansion of Lion's facility has almost doubled production capacity, which will allow Lion to meet additional demand without further significant debt-funded capex.
This will leave cash flows available to pay down debt.
In addition, the potential integration of MBL's production could enhance economies of scale.
Market Leadership: Lion is the leading domestic beer manufacturer with a significant share of beer produced in Sri Lanka in 2012 and 2013. Its flagship product is the Lion brand of beer. The proposed MBL acquisition will be favourable for Lion's business risk profile as it is expected to further increase Lion's share of domestic output and strengthen Lion's hold on beer production in the country.
The proposed acquisition will also bring new products such as MBL's Three Coins, Sando, and Grand Blonde brands, and give Lion access to Cargills' extensive retail chain.
High Regulatory Risk: Domestic producers of alcoholic beverages face frequent and large increases in alcohol tax, which encourages consumers to turn to illicit sources and impacts industry profitability.
The industry also faces restrictions on advertising and retail players, which benefit incumbent licensed players, such as Lion, which have already built up their distribution networks and established their brands.
RATING SENSITIVITIES
Negative: Future developments that may individually, or collectively, lead to negative rating action include:
- Leverage of over 2.0x on a sustained basis
- The rating could be downgraded if Lion is required to inject further cash or take on more liabilities to complete the acquisition.No positive rating action is expected over the next 24 months as leverage is likely to remain high. However, Future developments that may individually or collectively lead to a positive rating action include:
- Leverage of below 1.5x on a sustained basis.
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