Fitch Ratings Lanka has downgraded Sri Lanka-based Kotagala Plantations PLC's National Long-Term rating to 'CC(lka)' from 'B+(lka)'. The agency has also downgraded the National Long-Term rating on Kotagala's outstanding listed senior secured debentures of LKR1 billion to 'CC(lka)' from 'B+(lka)'.
The downgrade follows continued deterioration in the company's liquidity, as its operating EBITDA weakened further in the financial year ending-March 2016 (FY16) due to falling tea and rubber prices, high labour costs and poor labour productivity. Consequently, Kotagala's operating EBITDA of LKR30 million was insufficient to cover its borrowing costs of LKR503 million and the company had to utilise cash reserves to meet most of its financial obligations.
The company's EBITDA recovered to LKR247 million in 9MFY17, from LKR198 million in 9MFY16, driven by improving tea and rubber prices. However, we expect EBITDA to fall short of meeting the company's borrowing costs and operating lease rent in the next 12 months-18 months. Kotagala has around LKR546 million of bank loan maturities due in FY18. The company has benefitted from banks' willingness to restructure its borrowings in the past. However, principal repayments on its listed senior secured debenture will fall due in FY19, starting with LKR250 million principal due in May 2018.
Weak Liquidity; High Refinancing Risk: Kotagala faces substantial debt maturities from FY18 and we believe it will be challenging for the company to meet its obligations due to its low cash balance and negative free cash flow generation in the next two years. Further, the company does not have any committed credit lines at its disposal, limiting its financial flexibility and exposing it to significant refinancing risk. The company's efforts in FY16-FY17 to lower debt via asset disposals and extending the maturity of part of its existing debt has not led to a sustained improvement in liquidity.
Challenging Operating Conditions: The profitability of Kotagala's tea and rubber plantations has improved in the previous few months with rebounding global prices, but we do not believe the improvement is sufficient to offset the sector's structural decline stemming from continued supply-side pressure, such as lower productivity and high labour costs.
The downgrade follows continued deterioration in the company's liquidity, as its operating EBITDA weakened further in the financial year ending-March 2016 (FY16) due to falling tea and rubber prices, high labour costs and poor labour productivity. Consequently, Kotagala's operating EBITDA of LKR30 million was insufficient to cover its borrowing costs of LKR503 million and the company had to utilise cash reserves to meet most of its financial obligations.
The company's EBITDA recovered to LKR247 million in 9MFY17, from LKR198 million in 9MFY16, driven by improving tea and rubber prices. However, we expect EBITDA to fall short of meeting the company's borrowing costs and operating lease rent in the next 12 months-18 months. Kotagala has around LKR546 million of bank loan maturities due in FY18. The company has benefitted from banks' willingness to restructure its borrowings in the past. However, principal repayments on its listed senior secured debenture will fall due in FY19, starting with LKR250 million principal due in May 2018.
Weak Liquidity; High Refinancing Risk: Kotagala faces substantial debt maturities from FY18 and we believe it will be challenging for the company to meet its obligations due to its low cash balance and negative free cash flow generation in the next two years. Further, the company does not have any committed credit lines at its disposal, limiting its financial flexibility and exposing it to significant refinancing risk. The company's efforts in FY16-FY17 to lower debt via asset disposals and extending the maturity of part of its existing debt has not led to a sustained improvement in liquidity.
Challenging Operating Conditions: The profitability of Kotagala's tea and rubber plantations has improved in the previous few months with rebounding global prices, but we do not believe the improvement is sufficient to offset the sector's structural decline stemming from continued supply-side pressure, such as lower productivity and high labour costs.
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