(The following statement was released by the rating agency) COLOMBO, September 23 (Fitch) Fitch Ratings has assigned Abans Limited's proposed issue of senior unsecured redeemable debentures of up to LKR2bn an expected National Long-Term rating of 'A-(lka)(EXP)'. The rating is contingent upon the final transaction documents conforming to information already received. The proposed debentures are rated in line with the Sri Lanka-based retailer's National Long-Term Rating of 'A-(lka)', as they will rank equally with the company's other senior unsecured creditors. The debenture is expected to be issued in three tranches with maturities of three, four, and five years at fixed coupon rates. The proceeds will be used to re-finance part of the company's short-term borrowings, lowering the cost of funds, and will help reduce Abans' exposure to refinance- and interest rate risk. Key Rating Drivers Higher leverage: The Negative Outlook on the Issuer's Nati onal Long-Term rating reflects net leverage above the trigger of 4.5x lease-adjusted net debt/operating EBITDAR (ex. Abans Finance PLC) at 4.60x in FYE13 (financial year ends in March), up from 2.67x in FYE12. Leverage increased as a result of debt incurred to fund Abans's stake in its real estate development Joint Venture, the Colombo City Mall, in addition to bridging finance extended to a related company that housed what was once the group's motorcycle retail business. Fitch expects slower revenue growth for Abans in FYE14, leading to lower profitability in the company's cyclical core business of consumer durables. This may constrain Abans' ability to reduce its leverage below 4.5x by FYE14 and beyond, even if the bridging loan were repaid by the counterparty. Strong market share: Strong brands, in addition to an extensive distribution network of 1,059 outlets, 439 of which are Abans' own stores, contribute to Abans' position as a leading consumer durables retailer in Sri Lanka. Abans's revenue concentration on LG has reduced over the last three- to four years in favour of other brands such as HP, Haier, Toshiba, Philips, Whirlpool, and Sanyo. Moderate refinancing risk: At FYE13, Abans had LKR459m and LKR1.6bn of cash and unutilized credit facilities, respectively against LKR2.3bn debt maturing in FY14. Fitch expects free cash flow (FCF, defined as operating cash after dividends and capex) to remain negative in FY14 due to the working capital-intensive nature of the retail business, which will require a further increase in borrowings. These risks are mitigated by the strength of Abans's core business and its access to domestic banks. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to a negative rating action include: -Leverage being sustained above 4.5x at FYE14 and beyond -Fixed charge coverage (measured as EBITDAR/Interest expense + rent) falling below 1.25x on a sustained basis (FYE13:1.53x) -Material deviation in its real estate project from current expectations resulting in further cash injections from Abans -A material weakening of the credit profile of Abans Finance PLC Positive: No positive rating action is expected given that the rating is on a Negative Outlook. However, future developments that may individually or collectively lead to the Outlook being revised to Stable include: - Leverage falling below 4.5x on a sustained basis -Smooth progress of its real estate project which will limit Abans's financial liability to the initial investment value. Further details on Abans' are available on www.fitchratings.com and www.fitchratings.lk. Contacts: Primary Analyst Shyamila Serasinghe Analyst +941 1254 1900 Fitch Ratings Lanka Limited 15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst Kanishka De Silva Analyst +94 1 1254 1900 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, and 'National Ratings Criteria', dated 19 January 2011, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013 here National Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.C OM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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