Fitch Affirms Sri Lanka's Hayleys at 'AA-(lka)'; Outlook Stable

Fitch Ratings has today affirmed Sri Lanka's Hayleys PLC's (Hayleys) National Long-term rating at 'AA-(lka)' with a Stable Outlook.

The rating reflects Hayley's diverse dividend income base as a holding company, and its strong control over the operational and financial policies of its subsidiaries, which mitigates the subordination of group cash flows to its operating subsidiaries. In FY10 (the 12 month period to end-March 2010), dividend income accounted for 80% of Hayleys' revenues of LKR628m.

Fitch positively notes the improved financial profiles, higher expected profitability, and the resultant potential for higher dividends from some of Hayley's key divisions. The turnaround in its medical glove-manufacturing segment in Thailand, discontinuation of loss-making operations in the consumer and transportation segments, as well as the gradually increasing value addition in its purification segment are likely to result in stronger group earnings.

However, Hayley's operations are exposed to foreign currency risks, vagaries of the weather and industry cycles. Nearly 67% of Hayley's total revenues in FY10 were generated from exports - Europe (34% of export revenues) and US (21%). Weak global economic conditions and currency fluctuations, especially with a weaker Euro, can exert pressure on the demand and margins for Hayleys' products. As an export-oriented company, Hayleys is adversely affected by the strength of the Sri Lankan Rupee and rising domestic inflation.

The holding company's increased leverage in FY10 is mainly a result of an LKR1.8bn debt-funded investment in Hotel Services (Ceylon) PLC, and remains to be a concern as it will not begin yielding sizable dividends in the short-to-medium term. As at FYE10, investment spending resulted in net debt levels increasing by LKR1.4bn to LKR1.8bn. Including the subsidiary debt of LKR112m with recourse to the company, Hayleys' holding company's net adjusted debt/operating EBITDAR increased to 4.0x in FY10 (FY09: 2.7x). Consolidated net debt increased to LKR8.6bn as at FYE10 (FYE09: LKR6.9bn) given both the consolidation of Hayleys MGT PLC ('BBB+(lka)'/Negative) and increased investment spending. However, the consolidated adjusted debt net of cash/operating EBITDAR remained at 2.2x in FY10 (FY09: 2.2x) given improved group earnings.

Fitch notes that Hayleys' liquidity position is adequate. Higher debt at the holding company level will increase its debt amortisation substantially. The agency expects Hayleys' debt service coverage (as measured by interest and principal payments to FFO) to weaken to about 1x over the short-to-medium term, compared to the average of about 1.8x recorded from FY06 to FY09. However, the company had undrawn credit facilities amounting to LKR1bn at FYE10, lending support to its liquidity.

Positive rating triggers include a reduction in Hayleys' leverage to below 3.0x on a sustained basis, without an increase in the overall group's risk profile. Negative rating factors include an increased indebtedness in the holding company's leverage from further large investments with limited control over dividend policy or long payback periods.

Applicable Criteria available on Fitch's website, at www.fitchratings.com: "Corporate Rating Methodology", dated November 24, 2009.