Fitch Ratings has affirmed Sri Lanka-based Kotagala Plantations PLC's National Long-Term Rating at 'CC(lka)'. Fitch has also affirmed the National Rating on Kotagala's outstanding senior secured debentures at 'CC(lka)'.
The affirmation reflects the company's continued weak liquidity profile despite improved revenue and EBITDA, asset disposals and restructuring of bank facilities over the previous 12 months. Kotagala had LKR27million of unrestricted cash and no unutilised credit facilities as at end-March 2018 (FY18) to meet LKR671 million of short-term debt falling due in the next 12 months. There is a significant risk that Kotagala may not be able to meet its obligations as they fall due through internally generated cash flow.
Continued Weak Liquidity: We expect the company to continue facing high liquidity pressure in the next 12-18 months due to substantial debt maturities falling due starting 26 May 2018, when the first LKR250 million principal repayment of its LKR1 billion secured debenture falls due. The company holds little cash, does not have access to unutilised committed credit lines and is greatly constrained from generating positive free cash flow over the medium term due to losses from its rubber plantations and high debt-servicing costs. The company's efforts in FY18 to lower debt via asset disposals and debt restructuring have not led to a sustained improvement in its liquidity profile.
Kotagala plans to meet its upcoming repayment by using the LKR100 million proceeds from the partial sale of its stake in Union Commodities (Private) Limited (Unicom) in March 2018, LKR55 million from the sale of old rubber trees as timber and its remaining cash reserves. It also aims to raise high-cost credit facilities from customers and has the option of using the debenture's sinking-fund balance of LKR161 million at end-March 2018 to meet any shortfall, if needed. Even if Kotagala makes the upcoming repayment, there is little visibility as to how it will meet its remaining debt obligations - including the second principal repayment due May 2019 - unless it operating performance improves significantly or upon third-party support or restructuring.
High Refinancing Risk: We believe Kotagala has high re-financing risk, as lenders are likely to be cautious given the plantation sector's volatility and the company's weak financial profile. Kotagala's ability to raise funds through asset disposals is also limited following the divestment of its only profitable subsidiary, Unicom. Furthermore, the company was unsuccessful in raising fresh equity through its rights issue in December 2017 beyond what its parent, Consolidated Tea Plantations Limited (CTPL), injected as part of its share. This means Kotagala will likely have to resort to expensive sources to refinance its debt, such as customer advance payments, which could further exacerbate its credit profile.
Leverage to Remain High: Kotagala's leverage is likely to remain high in the medium term, as we expect moderating commodity prices and continued operating cost increases to adversely affect its EBITDA generation. Kotagala's adjusted net leverage/EBITDAR ratio improved to 9.3x as at end-2017, from 16.5x in FY17 (FY16: 125.3x), mainly from higher global tea prices, which we do not expect to be sustained.
Volatile EBITDAR: We expect tea and rubber sector profitability to be affected in the medium term by volatile end-market demand, lower labour productivity and cost pressure from periodic wage increases. Kotagala's tea segment has seen a strong rebound over the past nine months, helped by rising global prices. However, prices are likely to moderate over the medium-term with easing supply-side pressure.
The affirmation reflects the company's continued weak liquidity profile despite improved revenue and EBITDA, asset disposals and restructuring of bank facilities over the previous 12 months. Kotagala had LKR27million of unrestricted cash and no unutilised credit facilities as at end-March 2018 (FY18) to meet LKR671 million of short-term debt falling due in the next 12 months. There is a significant risk that Kotagala may not be able to meet its obligations as they fall due through internally generated cash flow.
Continued Weak Liquidity: We expect the company to continue facing high liquidity pressure in the next 12-18 months due to substantial debt maturities falling due starting 26 May 2018, when the first LKR250 million principal repayment of its LKR1 billion secured debenture falls due. The company holds little cash, does not have access to unutilised committed credit lines and is greatly constrained from generating positive free cash flow over the medium term due to losses from its rubber plantations and high debt-servicing costs. The company's efforts in FY18 to lower debt via asset disposals and debt restructuring have not led to a sustained improvement in its liquidity profile.
Kotagala plans to meet its upcoming repayment by using the LKR100 million proceeds from the partial sale of its stake in Union Commodities (Private) Limited (Unicom) in March 2018, LKR55 million from the sale of old rubber trees as timber and its remaining cash reserves. It also aims to raise high-cost credit facilities from customers and has the option of using the debenture's sinking-fund balance of LKR161 million at end-March 2018 to meet any shortfall, if needed. Even if Kotagala makes the upcoming repayment, there is little visibility as to how it will meet its remaining debt obligations - including the second principal repayment due May 2019 - unless it operating performance improves significantly or upon third-party support or restructuring.
High Refinancing Risk: We believe Kotagala has high re-financing risk, as lenders are likely to be cautious given the plantation sector's volatility and the company's weak financial profile. Kotagala's ability to raise funds through asset disposals is also limited following the divestment of its only profitable subsidiary, Unicom. Furthermore, the company was unsuccessful in raising fresh equity through its rights issue in December 2017 beyond what its parent, Consolidated Tea Plantations Limited (CTPL), injected as part of its share. This means Kotagala will likely have to resort to expensive sources to refinance its debt, such as customer advance payments, which could further exacerbate its credit profile.
Leverage to Remain High: Kotagala's leverage is likely to remain high in the medium term, as we expect moderating commodity prices and continued operating cost increases to adversely affect its EBITDA generation. Kotagala's adjusted net leverage/EBITDAR ratio improved to 9.3x as at end-2017, from 16.5x in FY17 (FY16: 125.3x), mainly from higher global tea prices, which we do not expect to be sustained.
Volatile EBITDAR: We expect tea and rubber sector profitability to be affected in the medium term by volatile end-market demand, lower labour productivity and cost pressure from periodic wage increases. Kotagala's tea segment has seen a strong rebound over the past nine months, helped by rising global prices. However, prices are likely to moderate over the medium-term with easing supply-side pressure.
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