Softlogic Rs. 500mn debt issue rated A-

Fitch Ratings Lanka has assigned Sri Lanka-based Softlogic Holdings PLC’s (SHL, A-(lka)/Stable) unsecured redeemable debentures a final National Long-Term rating of ‘A-(lka)’. SHL expects to list the debentures on the Colombo Stock Exchange, subject to regulatory approval.

The assignment of the final rating follows the receipt of final documents conforming to information previously received. The final rating is at the same level as the expected rating assigned on 25 March 2013.

"SHL issued LKR500m worth of debentures, which may be upsized by a further LKR500m in the event of oversubscription. The company is to use the debenture proceeds to refinance short-term debt, which will improve its liquidity profile," Fitch said in a statement.

"Strong healthcare business: As a holding company SHL relies on dividends from operating subsidiaries to meet its obligations, including from its core subsidiary, Asiri Hospital Holdings PLC (Asiri). Asiri is the leading domestic private-sector healthcare provider, with low business risk, supported by stable demand for healthcare services across economic cycles. As of 31 March 2013 (FYE13) Asiri contributed over 60% of both SHL’s consolidated EBITDAR and dividend income at the holding company-level.

Cyclical retail / leisure businesses: The higher business risk inherent in SHL’s retail, information technology, and leisure segments, counterbalances its strengths in healthcare. Higher business risk in these segments stems from more discretionary demand for products and services across economic cycles, and stronger competition. Medium-term project-related risks in SHL’s leisure sector developments are also key risks.

High leverage: SHL’s leverage (measured as lease-adjusted debt net of cash/operating EBITDAR) at the holding company level is high (FYE13: 5.1x), but Fitch expects this to fall below 3.5x by FYE14, primarily driven by higher dividend income from Asiri as its newer hospitals achieve economies of scale.

Future developments that may, individually or collectively, lead to a negative rating action include: Leverage at the holding company being sustained above 3.5x beyond FYE14; A structural weakening of the credit profiles of SHL’s key subsidiaries which may weaken the quality or quantum of dividend income, including a sustained increase in leverage at Asiri above 3.0x (FYE13: 2.7x). Fitch expects revenues and profit margins at Asiri to improve in the medium-term through enhanced economies of scale, which is likely to support lower leverage; SHL’s group EBITDAR/interest expense plus operating lease rent sustained below 1.25x (FYE13: 1.26x). Fitch expects this metric to improve in the medium-term alongside lower leverage.

Future developments that may, individually or collectively, lead to a positive rating action include: SHL’s financial leverage falling below 2.5x on a sustained basis together with dividends from Asiri being sustained at over 50% of total dividend income at the holding company-level. However as leverage was 5.1x at FYE13, Fitch does not expect positive rating action in the next 12 to 24 months," Fitch said.

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