(The following statement was released by the rating agency)
COLOMBO/SYDNEY, November 14 (Fitch) Fitch Ratings has assigned Sri Lanka-based Lion Brewery PLC's (Lion; AA-(lka)/Stable) unsecured redeemable debenture issue of up to LKR2bn a final National Long-Term rating of 'AA-(lka)'. The assignment of the final rating follows the receipt of documents conforming to information previously received, and is line with the expected rating assigned on 4 September 2014. The debenture rating is in line with Lion's National Long-Term Rating as the debentures constitute unconditional, unsubordinated and unsecured obligations of the company. The debenture, which is structured with a bullet maturity at the end of five years, is to be issued at a fixed rate, and is intended to refinance short-term debt, minimising exposure to short-term floating rate funding.
KEY RATING DRIVERS
High Leverage: Leverage, as measured by net adjusted debt/operating EBITDAR increased to 2.48x at end-October 2014, up from 2.05x a year earlier following the completion of Lion's acquisition of competing domestic brewer Millers Brewery Limited (MBL) and its trademarks, with the acquisition cost in line with our expectation. The acquisition comes on the heels of expansion at Lion's production facility, which resulted in high debt over the financial year ended 31 March 2013 (FY13) and FY14. Leverage over FY14 and FY13 was 2.11x and 2.59x respectively, exacerbated by margin deterioration as Lion had to sell more costly imported canned beers at the same price as domestic production. Fitch expects leverage metrics to improve over the medium term, driven by improved profitability with the replacement of canned imports by local production from mid-FY14.
Increased Production Capacity: Lion has almost doubled its production capacity, allowing it to meet additional demand without further significant debt-funded capex. The expanded production facility will be able to accommodate integration of MBL's volumes, which could enhance economies of scale.
Market Leadership: Lion is the leading beer producer in Sri Lanka, with sales led by its flagship Lion brand. The MBL acquisition will be favourable for Lion's business risk profile as it will increase Lion's share of beer production in the country. The acquisition will also add new products such as MBL's Three Coins, Sando, and Grand Blonde brands to Lion's portfolio.
High Regulatory Risk: The Sri Lankan government frequently raises taxes on domestic alcohol production to curb consumption, which encourages consumers to turn to illicit sources and depresses industry profitability. Lion was hit with two excise duty increases in October 2014. There are also restrictions on advertising and retailing of alcohol, which inhibit growth of consumption, although this allows incumbent licensed players with established brands and distribution networks, such as Lion, to preserve their market share.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - Leverage of over 2.0x on a sustained basis
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.
Contact:
Primary Analyst Shyamila Serasinghe Analyst +94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower World Trade Center Colombo 01 Secondary Analyst Kanishka De Silva Analyst +94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower World Trade Center Colombo 01 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Additional information is available on www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014, and 'National Scale Ratings Criteria', dated 30 October 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage hereNational Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
COLOMBO/SYDNEY, November 14 (Fitch) Fitch Ratings has assigned Sri Lanka-based Lion Brewery PLC's (Lion; AA-(lka)/Stable) unsecured redeemable debenture issue of up to LKR2bn a final National Long-Term rating of 'AA-(lka)'. The assignment of the final rating follows the receipt of documents conforming to information previously received, and is line with the expected rating assigned on 4 September 2014. The debenture rating is in line with Lion's National Long-Term Rating as the debentures constitute unconditional, unsubordinated and unsecured obligations of the company. The debenture, which is structured with a bullet maturity at the end of five years, is to be issued at a fixed rate, and is intended to refinance short-term debt, minimising exposure to short-term floating rate funding.
KEY RATING DRIVERS
High Leverage: Leverage, as measured by net adjusted debt/operating EBITDAR increased to 2.48x at end-October 2014, up from 2.05x a year earlier following the completion of Lion's acquisition of competing domestic brewer Millers Brewery Limited (MBL) and its trademarks, with the acquisition cost in line with our expectation. The acquisition comes on the heels of expansion at Lion's production facility, which resulted in high debt over the financial year ended 31 March 2013 (FY13) and FY14. Leverage over FY14 and FY13 was 2.11x and 2.59x respectively, exacerbated by margin deterioration as Lion had to sell more costly imported canned beers at the same price as domestic production. Fitch expects leverage metrics to improve over the medium term, driven by improved profitability with the replacement of canned imports by local production from mid-FY14.
Increased Production Capacity: Lion has almost doubled its production capacity, allowing it to meet additional demand without further significant debt-funded capex. The expanded production facility will be able to accommodate integration of MBL's volumes, which could enhance economies of scale.
Market Leadership: Lion is the leading beer producer in Sri Lanka, with sales led by its flagship Lion brand. The MBL acquisition will be favourable for Lion's business risk profile as it will increase Lion's share of beer production in the country. The acquisition will also add new products such as MBL's Three Coins, Sando, and Grand Blonde brands to Lion's portfolio.
High Regulatory Risk: The Sri Lankan government frequently raises taxes on domestic alcohol production to curb consumption, which encourages consumers to turn to illicit sources and depresses industry profitability. Lion was hit with two excise duty increases in October 2014. There are also restrictions on advertising and retailing of alcohol, which inhibit growth of consumption, although this allows incumbent licensed players with established brands and distribution networks, such as Lion, to preserve their market share.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - Leverage of over 2.0x on a sustained basis
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.
Contact:
Primary Analyst Shyamila Serasinghe Analyst +94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower World Trade Center Colombo 01 Secondary Analyst Kanishka De Silva Analyst +94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower World Trade Center Colombo 01 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Additional information is available on www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014, and 'National Scale Ratings Criteria', dated 30 October 2013, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage hereNational Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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