- ICRA Lanka cuts Softlogic’s rating outlook to Negative from Stable
- Says Negative outlook reflects significant business interruptions from Easter bombings and COVID-19
Back-to-back business interruptions, rising debt, delay in raising cash caused by macro-political challenges and stretched liquidity conditions in light of current pandemic are weighing on Softlogic Holdings PLC (SHL) as ICRA Lanka revised the firm’s rating outlook to Negative from Stable.
ICRA has a ‘BBB+’ rating on the diversified conglomerate, which was re-affirmed, last week.
According to ICRA, the Easter attacks last year and the current pandemic have interrupted Softlogic’s key businesses such as retail and leisure as mandatory business closures, controls on imports on items government deems non-essential and travel restrictions are taking a heavier toll on the company.
What could amplify the situation is the depleted incomes of the people to buy consumer durables and some up market retail clothing and accessories sold by Softlogic outlets even after the worst of the pandemic passes.
The tourism sector, which has completely grounded to a halt due to the pandemic, is also a crucial element, which determines the fate of the retail business of the luxury retailer.
As of December 2019, retail and leisure sectors together accounted for 54 percent of the group revenue—retail 50 percent and leisure 4 percent.
Softlogic has interests in healthcare via its Asiri hospitals chain, financial services through Softlogic Life and its namesake finance company and restaurants and automobile dealership.
“ICRA Lanka’s Negative outlook reflects the significant business interruption experienced after the terrorist events last year and the likely interruptions due to the pandemic and the resultant lockdown and the anticipated drop in demand by the various sectors of the group (especially for consumer durables), over short to medium term,” the rating agency said.
Last month, Softlogic announced group wide salary cuts between 5 percent to 30 percent for those who are earning above Rs.50, 000 for 3 months and cost saving measures to conserve cash to stay nimble and afloat during the pandemic as most of its businesses are shuttered.
Unlike consumer staples or essentials, consumer durables and discretionary sectors are highly susceptible to economic downturns and could take relatively longer time to return to normalcy. It was only few weeks ago Fitch Ratings downgraded Singer Sri Lanka, the largest consumer durables retailer by a notch to ‘BBB+’ with a Negative outlook. Earlier it revised Abans’ rating outlook to Negative while affirming its ‘BBB+’ rating.
Softlogic meanwhile showed increasing debt levels, particularly during the last 18 months as the holding company heavily supported the group retail and leisure sectors, exerting pressure on the gearing and coverage indicators, which showed some improvement after the private placement and the rights issue during 1Q19.
“ICRA Lanka notes the sharp increase in net debt at the holding company level, from about Rs.20.9 billion in March 2019 to about Rs.26.2 billion in December 2019; standalone gearing stood at 1.81x as in December 2019 vis-à-vis 1.31x in March 2019 and 1.36x in March 2018”.
The adjusted gearing of the consolidated entity (excluding public deposits, revaluation reserve and deferred tax) was 5.06x as in December 2019 vis-s-vis 3.91x in March 2019 and 3.58x in March 2018”, the rating agency said. While the rating agency expects the gearing levels to moderate if the ongoing capital raising exercises and disposal of non-core assets are realized, the timely completion of either hinges on the how soon the markets return to normal. “Also, it is crucial for SHL to improve the overall profitability and cash flow generation of its retail sector and stabilize new projects, so that the pressure on the holding company moderates”, it added. Meanwhile ICRA Lanka also cautioned on liquidity pressure on the group from higher short-term debt servicing payments. As of December 2019, the group had Rs.4.2 billion of term loan repayments and Rs.8.4 billion of commercial paper maturities due over the 12 months.
“While ICRA Lanka expects the banks to roll-over these short-term loan maturities as they have done in the past, a high refinancing risk stems from non-bank commercial paper maturities,” it said. However, on the positive side, the rating agency expects the company to leverage on its good banking relationships to secure funding to meet immediate liquidity requirements.
The group also has Rs.2.5 billion worth unutilised bank lines as of April 2020. Along with the revision of the entity’s outlook, the rating agency also revised the outlook of the company’s Rs.1.0 billion debenture affirming its rating at ‘BBB+’ while withdrawing the rating of the unissued amount of the other debenture which amounted to Rs.1.0 billion at the company’s request.