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T R O U B L E D C O M P A N Y R E P O R T E R
A S I A P A C I F I C
Friday, April 24, 2020, Vol. 23, No. 83
Headlines
A U S T R A L I A
GO SMART: Second Creditors' Meeting Set for May 4
HUDSON ENTERPRISES: RSM Australia Appointed as Administrators
JIMMY'S RECIPE: Second Creditors' Meeting Set for May 1
MEDLYN COURIERS: Second Creditors' Meeting Set for April 30
NORCHAP INDUSTRIES: First Creditors' Meeting Set for May 1
NUFARM LIMITED: Moody's Alters Outlook on Ba3 CFR to Negative
SWEET LIFE: First Creditors' Meeting Set for May 1
THORN GROUP: Radio Rentals Shuts Stores for Good; 300 Jobs Axed
TICKETEK: S&P Cuts ICR to B- on Revenue Declines, Outlook Negative
TILLY FRENCH: Second Creditors' Meeting Set for April 29
VIRGIN AUSTRALIA: Chinese Rescue of Up In Air Amid Debt Troubles
VIRGIN AUSTRALIA: Fitch Cuts IDR to D on Voluntary Administration
VIRGIN AUSTRALIA: S&P Lowers ICR to 'CC', Outlook Negative
VIRGIN AUSTRALIA: Shareholder Threatens to Sack 2,000 Workers
ZAM GC: First Creditors' Meeting Set for May 1
C H I N A
CONCORD NEW: Fitch Alters Outlook on 'BB-' LT IDR to Negative
UNION LIFE: Moody's Reviews Ba1 Unsec. Debt Rating for Downgrade
XINYUAN REAL ESTATE: S&P Affirms 'B-' LongTerm ICR, Outlook Stable
I N D I A
ADINATH AGRO: Ind-Ra Assigns 'BB' LT Issuer Rating, Outlook Stable
B. MELARAM & SONS: ICRA Lowers Rating on INR7cr LT Loan to 'B'
BISCON TILES: ICRA Reaffirms B Rating on INR4.87cr Term Loan
BLUE DUCK: Ind-Ra Lowers LongTerm Issuer Rating to 'D'
CHHABRA ISPAT: Ind-Ra Affirms BB+ LT Issuer Rating, Outlook Stable
CREVITA GRANITO: ICRA Reaffirms B+ Rating on INR25.50cr Loan
CYBERWALK TECH: ICRA Reaffirms 'D' Rating on INR68.84cr Term Loan
EDWARD FOOD: ICRA Reaffirms C+ Rating on INR36cr Debentures
FUTURE CORPORATE: ICRA Lowers Rating on INR226.67cr Loan to C
FUTURE RETAIL: S&P Cuts Prelim. LT ICR to 'CCC-', On Watch Negative
GREENKO ENERGY: S&P Affirms 'B+' ICR, Outlook Stable
HERO FINCORP: S&P Lowers ICRs to 'BB+/B' on Lower Group Support
HIRA POWER: ICRA Reaffirms 'B+' Rating on INR79cr LT Loan
HS SANDHU BUILDERS: ICRA Assigns B+ Rating to INR6.25cr LT Loan
KARNA INT'L: ICRA Hikes Rating on INR13.50cr Loan to B
KNOWLEDGE EDUCATION: Ind-Ra Keeps D Loan Rating in Non-Cooperating
LAVISH POLYFAB: ICRA Assigns 'B+' Rating to INR2.95cr Loan
LEITWIND SHRIRAM: Ind-Ra Keeps D Issuer Rating in Non-Cooperating
MALNADY TEA: Ind-Ra Migrates BB Issuer Rating to Non-Cooperating
NOVELTY ASSOCIATES: Ind-Ra Moves 'BB' Rating to Non-Cooperating
P.N. WRITER: Ind-Ra Puts 'BB+' Issuer Rating on Watch Negative
PAN INDIA: ICRA Keeps 'D' Rating in Not Cooperating Category
PATNA HIGHWAY: Insolvency Resolution Process Case Summary
PERFECTO ELECTRICALS: ICRA Reaffirms 'C' Rating on INR7.50cr Loan
PS TOLL: ICRA Lowers Rating on INR790cr Term Loan to B+
RELIGARE FINVEST: ICRA Reaffirms 'D' Rating on INR9220cr Loans
RURAL FAIRPRICE: ICRA Lowers Rating on INR320cr NCD to 'D'
SHIV DAL MILL: ICRA Reaffirms B+ Rating on INR5cr Cash Loan
SWASTIK POWER: ICRA Reaffirms 'D' Rating on INR38cr Term Loan
THERAPIVA PRIVATE: ICRA Assigns B- Rating to INR103.80cr Loan
TINNA RUBBER: ICRA Reaffirms B+ Rating on INR22cr Cash Loan
WRITER LIFESTYLE: Ind-Ra Places BB+ Issuer Rating on Watch Negative
I N D O N E S I A
ALAM SUTERA: Fitch Cuts LongTerm IDR to 'B-', On Watch Negative
BAYAN RESOURCES: Fitch Affirms BB- LongTerm IDR, Outlook Stable
BUANA LINTAS: Fitch Alters Outlook on 'B+' LT IDR to Negative
BUKIT MAKMUR: Moody's Alters Outlook on Ba3 CFR to Negative
KAWASAN INDUSTRI: Fitch Alters Outlook on 'B' LT IDR to Negative
PAN BROTHERS: Moody's Cuts CFR to B2, Outlook Negative
REJEKI ISMAN: Moody's Alters Outlook on Ba3 CFR to Negative
J A P A N
ARCH FINANCE 2007-1: Moody's Cuts JPY12 Trillion Loan to B1
[*] JAPAN: Bailouts, Delistings Loom for Struggling Local Banks
M A C A U
MELCO RESORTS: S&P Retains 'BB' LT ICR on CreditWatch Negative
S I N G A P O R E
HIN LEONG: Hin Leong Seeks to Appoint PwC as Judicial Managers
HIN LEONG: Sembcorp Subsidiary Terminates Gasoil Supply Deal
S R I L A N K A
ABANS FINANCE: Fitch Alters Outlook on 'BB+(lka)' Rating to Neg.
CEYLON BANK: Moody's Reviews B2 Deposit Rating for Downgrade
SIERRA CABLES: Fitch Cuts LT IDR to BB(lka), On Watch Negative
T H A I L A N D
THAI AIRWAYS: On Financial Brink as Government Debates Rescue
- - - - -
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A U S T R A L I A
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GO SMART: Second Creditors' Meeting Set for May 4
-------------------------------------------------
A second meeting of creditors in the proceedings of Go Smart Pty
Ltd, trading as The CEO Institute WA, has been set for May 4, 2020,
at 10:00 a.m. via teleconference only.
The purpose of the meeting is (1) to receive the report by the
Administrator about the business, property, affairs and financial
circumstances of the Company; and (2) for the creditors of the
Company to resolve whether the Company will execute a deed of
company arrangement, the administration should end, or the Company
be wound up.
Creditors wishing to attend are advised proofs and proxies should
be submitted to the Administrator by May 1, 2020, at 5:00 p.m.
Cameron Shaw and Richard Albarran of Hall Chadwick were appointed
as administrators of Go Smart Pty on March 18, 2020.
HUDSON ENTERPRISES: RSM Australia Appointed as Administrators
-------------------------------------------------------------
Jonathon Kingsley Colbran and Frank Lo Pilato of RSM Australia
Partners were appointed as administrators of Hudson Enterprises
(Aust) Pty Ltd on April 22, 2020.
JIMMY'S RECIPE: Second Creditors' Meeting Set for May 1
-------------------------------------------------------
A second meeting of creditors in the proceedings of Jimmy's Recipe
Pty Ltd has been set for May 1, 2020, at 10:00 a.m. via telephone
conference.
The purpose of the meeting is (1) to receive the report by the
Administrator about the business, property, affairs and financial
circumstances of the Company; and (2) for the creditors of the
Company to resolve whether the Company will execute a deed of
company arrangement, the administration should end, or the Company
be wound up.
Creditors wishing to attend are advised proofs and proxies should
be submitted to the Administrator by April 30, 2020, at 4:00 p.m.
Gavin Moss and Desmond Teng of Chifley Advisory were appointed as
administrators of Jimmy's Recipe on March 18, 2020.
MEDLYN COURIERS: Second Creditors' Meeting Set for April 30
-----------------------------------------------------------
A second meeting of creditors in the proceedings of Medlyn Couriers
Pty Ltd, formerly trading as Cool Couriers Refrigerated Freight
Services, has been set for April 30, 2020, at 11:00 a.m. at the
offices of Hamilton Murphy Advisory Pty Ltd, Level 1, at 255 Mary
Street, in Richmond, Victoria.
The purpose of the meeting is (1) to receive the report by the
Administrator about the business, property, affairs and financial
circumstances of the Company; and (2) for the creditors of the
Company to resolve whether the Company will execute a deed of
company arrangement, the administration should end, or the Company
be wound up.
Creditors wishing to attend are advised proofs and proxies should
be submitted to the Administrator by April 29, 2020, at 4:00 p.m.
Stephen Robert Dixon of Hamilton Murphy Advisory was appointed as
administrator of Medlyn Couriers on March 17, 2020.
NORCHAP INDUSTRIES: First Creditors' Meeting Set for May 1
----------------------------------------------------------
A first meeting of the creditors in the proceedings of Norchap
Industries Pty Ltd, trading as Zambrero Chevron, will be held on
May 1, 2020, at 10:00 a.m. Creditors wishing to attend by
electronic means are advised they can use the following facility:
Facility details: 1-800-062-923
Password: 784859517874#
Michael Caspaney of Menzies Advisory was appointed as administrator
of Norchap Industries on April 21, 2020.
NUFARM LIMITED: Moody's Alters Outlook on Ba3 CFR to Negative
-------------------------------------------------------------
Moody's Investors Service has affirmed Nufarm Limited's corporate
family rating of Ba3 and Nufarm Americas Inc.'s and Nufarm
Australia Limited's backed senior unsecured ratings of B1.
At the same time, Moody's has changed the outlooks on all entities
to negative from developing.
RATINGS RATIONALE
"The affirmation of the Ba3 corporate family rating reflects
Nufarm's well-established position in the off-patent crop
protection segment; its strategically located downstream plants
which are close to major customers and sales areas; and its
geographic, albeit reduced with the sale of the South American
business, and product diversification," says Maadhavi Barber, a
Moody's Analyst.
Moody's expects Nufarm's leverage will improve -- as measured by
adjusted debt/EBITDA -- to around 4.6x in the fiscal year ending
July 2020 (fiscal 2020) from 6.4x in fiscal 2019, as proceeds from
the South American divestment are applied for debt reduction. The
forecast also reflects Moody's expectation that there will be a
significant improvement in 2H2020 EBITDA compared to 1H2020, from
improving weather conditions in Australia and the US, combined with
lower raw material costs in Europe.
The South American divestment -- completed on April 1 -- reduces
the geographic diversification of the company and exposes Nufarm to
increased cashflow variability given the highly seasonal business.
However, this is balanced against Moody's expectation that the
divestment of the working capital intensive South American business
will improve the working capital position of the remaining business
and reduce financing and foreign exchange costs. Nufarm's South
American business has not generated free cash flows for the past
five years and has been a drain on cashflow of the broader group.
The change in outlook to negative reflects Moody's expectation that
credit metrics could come under pressure if EBITDA for fiscal 2020
falls below expectations, particularly amidst weak global economic
conditions.
The ratings also consider the following environmental, social and
governance factors:
Nufarm's ratings reflect elevated environmental risks, with
earnings susceptible to adverse weather conditions. Short-term
revenue and profitability are influenced by climatic conditions
such as drought or excessive rainfall, which can have a significant
impact on demand for crop protection products. Nufarm's geographic
diversification, however, somewhat mitigates this risk. Nufarm also
faces environmental risks with issues such as land use, waste
management, water, soil and air pollution caused by large
manufacturing plants and facilities.
Like other chemical producers, Nufarm faces potential reputational
and/or regulatory and legal risks over health and safety concerns
about glyphosate. Glyphosate products comprise around 10% of
Nufarm's products. The company does not manufacture glyphosate,
instead it purchases glyphosate to formulate into glyphosate based
products, which it distributes. However, there remains a risk of
future litigation against suppliers of glyphosate-based products.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could change the outlook to stable if there is consistent
improvement in performance across Nufarm's business, including a
sustained improvement in the quality and predictability of its
earnings and sustained cash flow from operations over the next
12-18 months and a sustained commitment to debt management. The
ratings will also benefit from longer term committed working
capital facilities
The rating could be downgraded if Nufarm the company does not
improve earnings in the six months to July 2020, in line with
Moody's expectations, such that adjusted debt/EBITDA remains above
4.75x for an extended period, and the company continues to rely on
short-term working capital facilities. A deterioration in Nufarm's
liquidity, including its reliance on short-term funding, would also
lead to negative rating pressure.
The principal methodology used in these ratings was Chemical
Industry published in March 2019.
Nufarm Limited is a crop protection company that manufactures and
sells a range of crop protection products, including herbicides,
insecticides and fungicides.
SWEET LIFE: First Creditors' Meeting Set for May 1
--------------------------------------------------
A first meeting of the creditors in the proceedings of The Sweet
Life Farms Australia Pty Ltd will be held on May 1, 2020, at 11:00
a.m. via telephone conference.
Steve Naidenov and Ian Niccol of Aston Chace Group were appointed
as administrators of The Sweet Life Farms Australia on April 21,
2020.
THORN GROUP: Radio Rentals Shuts Stores for Good; 300 Jobs Axed
---------------------------------------------------------------
Dominic Powell at the Sydney Morning Herald reports that appliance
and electronics lender Radio Rentals will permanently shut all shop
locations across Australia and make approximately 300 staff
redundant, marking the first major retail casualty of the
coronavirus crisis.
In a statement on April 23, ASX-listed parent company Thorn Group
told investors its 62 Radio Rental stores and selected warehouses
would stay closed permanently, blaming the "coronavirus-driven
downturn in the retail sector".
The news prompted a huge 30 per cent spike in the value of Thorn's
shares, which traded at 10 cents around midday as investors reacted
positively to the removal of the loss-making stores.
SMH relates that Thorn, which also operates a separate business
finance arm, plans to transform the Radio Rentals brand into a
purely online business and focus on enhancing its existing online
platform.
"I am disappointed that we have been forced to make hard decisions
regarding our staff and store network, however they have had to be
made to ensure Thorn Group continues to operate and thrive in the
future," SMH quotes chief executive Peter Lirantzis as saying in
the statement. "We intend to re-develop both the Radio Rentals'
digital business model and Thorn Business Finance once the COVID-19
crisis has passed."
Radio Rentals, which loans goods to consumers in return for monthly
payments, currently has AUD123 million in arrears, which it plans
to recoup over the coming months, SMH discloses.
Proceeds from this, along with AUD40 million in cash the business
currently has on hand, will be used to pay out staff redundancies
and cover the costs of breaking various rental agreements across
the store network, the report relates.
According to the report, a range of other cost-cutting initiatives
will also be undertaken, though Mr Lirantzis warned increased
arrears across both Radio Rentals and Thorn's business finance arm
would force the business to write off some loans.
"These conditions are expected to continue to create a range of
challenges and complex conditions for the Thorn business over
coming months," he said.
Radio Rentals stores first closed on April 2, joining hundreds of
other high profile retailers including department store Myer and
outdoors brand Kathmandu to shut doors in response to the
coronavirus outbreak, SMH adds.
TICKETEK: S&P Cuts ICR to B- on Revenue Declines, Outlook Negative
------------------------------------------------------------------
S&P Global Ratings lowered its issuer credit rating on Ticketek's
(rated entity TEG Pty Ltd.) to 'B-' from 'B'. At the same time, S&P
lowered the related issue rating on the company's US$285 million
first-lien term loan B (consisting of a US$205 million tranche and
A$118.2 million tranche) to 'B-' from 'B' with a recovery rating of
'3'. S&P lowered the issue rating on TEG's US$100 million
second-lien term loan B to 'CCC' from 'CCC+' with a recovery rating
of '6'.
S&P said, "We lowered the ratings to reflect TEG's substantially
lower revenue generation amid restrictions placed on nonessential
indoor crowd attendances and postponements of major sporting and
artist events in Australia and New Zealand. The increased social
distancing efforts and government policies to limit the spread of
coronavirus have led to a cessation of live music, sporting, and
theater events during the outbreak. In our view, the mass-gathering
restrictions in TEG's key operating markets are likely to remain in
force for longer than we initially anticipated. As a result, we
expect TEG to continue to generate negligible revenue over the next
few months at least.
"In our view, TEG also remains significantly exposed to a downturn
in consumer discretionary spending. We believe it is unclear how
consumers will respond once social distancing restrictions are
lifted. The live entertainment industry has high sensitivity to
shifting public tastes and global tour schedules, and we therefore
see TEG as more susceptible to a downturn if consumer discretionary
spending decreases. Further, given live music tours are typically
booked several months in advance with a pre-fixed guaranteed amount
paid to artists, tour rescheduling or artist cancellations can
threaten TEG's financial performance. The ticketing segment has
traditionally provided more stability and predictability thanks to
the company's multiyear contracts with major event venues and
extensive relationship network with artists. However, the current
social distancing measures and significant restrictions imposed on
attendance to live events will disrupt this source of earnings.
"Despite meaningful reductions to TEG's cost base, we still expect
negative EBITDA generation for the duration of the COVID-19
shutdown period. TEG is pursuing a number of initiatives to manage
its costs and limit monthly cash outflows. We believe the company
will continue to aggressively manage its cost base, particularly
its variable costs. Despite the initiatives, we expect significant
negative EBITDA generation during the coronavirus shutdown due to
fixed costs that cannot be reduced immediately in line with revenue
declines. As a result, we believe EBITDA generation will be
substantially impaired, leading to negative free operating cash
flow (FOCF) and leverage meaningfully exceeding our 5.5x threshold
for the previous 'B' rating in the year ending June 30, 2020, and
remaining above this level for an extended period. Further, we
believe TEG's highly leveraged capital structure will limit its
ability to restore credit measures beyond fiscal 2020."
TEG's unrestricted cash balance and capital-light operating model
will provide liquidity support in the near term. The cash balance
(about A$140 million of unrestricted cash inclusive of A$28 million
drawn from the company's revolving credit facility) and additional
A$80 million of primary equity received from minority investors
underpin the current liquidity position. S&P said, "We also believe
TEG's annual capital expenditure requirement of around A$10
million-A$15 million, which is largely for maintenance and
exclusive of ticketing contract advances, will not in itself
meaningfully increase cash outflow. The company's current sources
of liquidity will provide a limited ability to weather the
challenging operating environment. Nevertheless, we believe TEG's
inability to generate revenue during periods of social distancing
measures will continue to deteriorate its liquidity position."
The duration of restrictions on nonessential indoor gatherings
depends on when COVID-19 infections peak and public attendance is
reintroduced for major sporting and other entertainment events.
These include the Australian Football League and National Rugby
League, as well as major artist tours. S&P also believes weakened
domestic market conditions and declines in consumer discretionary
spending will continue to curtail ticketing revenue and the
pipeline of tours scheduled over the next 18 months.
S&P Global Ratings acknowledges a high degree of uncertainty about
the rate of spread and peak of the coronavirus outbreak. S&P said,
"Some government authorities estimate the pandemic will peak about
midyear, and we are using this assumption in assessing the economic
and credit implications. We believe the measures adopted to contain
COVID-19 have pushed the global economy into recession. As the
situation evolves, we will update our assumptions and estimates
accordingly."
Environmental, Social, and Governance (ESG) Credit Factors for this
rating and outlook change:
-- Social: Safety Management Factors
The negative outlook reflects TEG's exposure to sporting and live
entertainment events currently being postponed or canceled as a
result of the COVID-19 pandemic. S&P believes there is substantial
risk that the disruptions to these events could be protracted
beyond its expectations. This scenario would worsen operational
challenges such that TEG is unable to adequately manage its cost
structure, cash flow, and liquidity, leading to an unsustainable
capital structure.
S&P said, "We could lower the rating if we believe that the company
would not be able to successfully manage its liquidity amid further
COVID-19-related effects on the live events industry. This could
occur if the ongoing cash outflow threatens to erode TEG's
currently adequate liquidity buffer or we expect the company to be
unable to be granted an amendment or waiver to its credit agreement
to avoid a covenant violation.
"We could also lower the rating if we viewed the capital structure
as unsustainable due to a materially slower return of live events
such that cash flow generation were minimal in the longer term.
"We could revise the outlook to stable if the COVID-19 crisis
passes with limited longer-term impact on TEG's credit metrics.
Rating stability would likely be based on the expectation that
restrictions to ticketed events and tour cancellations would be
lifted and the company returns to sustainable positive free cash
flow."
TILLY FRENCH: Second Creditors' Meeting Set for April 29
--------------------------------------------------------
A second meeting of creditors in the proceedings of Tilly French
Pty Ltd (Formerly Known As "Tilly Murray Pty Ltd") has been set for
April 29, 2020, at 11:00 a.m. via telephone conference facilities.
The purpose of the meeting is (1) to receive the report by the
Administrator about the business, property, affairs and financial
circumstances of the Company; and (2) for the creditors of the
Company to resolve whether the Company will execute a deed of
company arrangement, the administration should end, or the Company
be wound up.
Creditors wishing to attend are advised proofs and proxies should
be submitted to the Administrator by April 28, 2020, at 5:00 p.m.
Michael Carrafa and Fabian Kane Micheletto of SV Partners were
appointed as administrators of Tilly French on March 16, 2020.
VIRGIN AUSTRALIA: Chinese Rescue of Up In Air Amid Debt Troubles
----------------------------------------------------------------
South China Morning Post reports that a bailout of Virgin
Australia, the first aviation casualty in the Asia-Pacific region
from the global coronavirus pandemic, is under a cloud of
uncertainty amid the financial troubles among its majority-owned
Chinese investors, and tightening scrutiny on foreign investment by
authorities.
SCMP says the Brisbane-based airline last week went for voluntary
administration under AUD5 billion (US$3.15 billion) of debt burden,
after failing to get a lifeline from shareholders and the
Australian government. The procedure is akin to the US Chapter 11
bankruptcy protection filing, the first major victim in the region
since the coronavirus outbreak.
China's three largest carriers, namely Air China, China Southern
Airlines, China Eastern Airlines were considering buying stakes in
the troubled carrier, Australian media said earlier this month
citing anonymous sources, SCMP relays.
"It is hard for HNA Group to save itself now, its cash flow is
insufficient to sustain its own livelihood, the chance for it to
increase overseas investment is extremely low," said Qi Qi, an
associate professor at Guangzhou Civil Aviation College, shrugging
off the likelihood of HNA ploughing more money into the stricken
Australian carrier, SCMP relays.
"HNA Group is under the government management," the report quotes
Qi as saying. "It is not that likely that it would continue to
expand in the aviation industry" with the latest round of industry
upheaval.
The group effectively owned a 19.86 per cent stake in Virgin
Australia, based on the its financial report as of September last
year, while Shandong-based private investor Nanshan Capital held
20.01 per cent. Etihad Airways and Singapore Airlines each owned
about one-fifth share.
According to the report, the rescue by Chinese investors are in
doubt as the cash-strapped HNA Group itself is officially under de
facto state ward, having accumulated some US$707 billion of debt
from a decade of global buying spree.
SCMP relates that the group has been selling assets to raise cash,
including an office tower in Shanghai, as reported this week. Part
of its revival plan is said to involve the three biggest Chinese
state-controlled carriers, according to media reports.
"Chinese airlines may be interested in buying the stakes in Virgin
Australia," the report quotes Diao Weimin, a professor at the
government-run Civil Aviation Management Institute of China in
Beijing, as saying. However, "the largest three airlines in China
are state controlled, such an acquisition would not be simply based
on the market, they need to go through authorities' approval," he
added.
SCMP says the failure of Virgin Australia, which competes with
Qantas as full-service airlines, came as the Covid-19 pandemic
forced global carriers to ground most of their fleet as the
industry predicted a US$314 billion of losses in passenger revenue
this year.
The Australian Treasurer will have the final say in Virgin
Australia's debt reorganisation, according to Craig Parker, a
senior director at S&P Global Ratings in Sydney. The firm on
Tuesday cut Virgin Australia's rating to CC from CCC with a
negative outlook, the report adds.
About Virgin Australia
Brisbane, Queensland-based Virgin Australia is Australia's
second-largest airline. It commenced services in 2000 as Virgin
Blue, wholly owned by the Virgin Group.
As reported in the Troubled Company Reporter-Asia Pacific on April
22, 2020, Bloomberg News related that Virgin Australia Holdings
Ltd. became Asia's first airline to fall to the coronavirus after
the outbreak deprived the debt-burdened company of almost all
income. Administrators at Deloitte, who have taken control of the
Brisbane-based carrier, aim to restructure the business and find
new owners within months. More than 10 parties have expressed an
interest, Deloitte related on April 21.
According to Bloomberg, Virgin Australia, which has furloughed 80%
of its 10,000 workers, will continue to operate some flights for
essential workers, freight and the repatriation of Australians. The
airline's frequent flyer program is a separate company and is not
in administration.
VIRGIN AUSTRALIA: Fitch Cuts IDR to D on Voluntary Administration
-----------------------------------------------------------------
Fitch Ratings has downgraded Virgin Australia Holdings Limited's
Long-Term Foreign-Currency Issuer Default Rating to 'D' from
'CCC-', following the carrier's announcement it has entered
voluntary administration.
VAH said on April 21, 2020 it will continue to seek financial
assistance - but to date has not successfully secured the required
support - to shore up its liquidity and ongoing financial position
as the majority of its planes remain grounded due to the travel
restrictions imposed in Australia to combat the coronavirus. Fitch
understands that the administrators and the Australian state and
federal governments, alongside VAH, are seeking a new buyer for the
airline to ensure two viable airlines remain in Australia, although
Fitch expects the footprint of VAH emerging from the administration
proceedings to differ from its historical form.
Fitch expects VAH's balance sheet to be restructured as part of
this process, and creditors will likely be required to take a
haircut on its outstanding debt. Once the airline exits the
administration proceedings, Fitch will assess its new strategy and
restructured financial profile and re-rate VAH accordingly.
KEY RATING DRIVERS
Entering Voluntary Administration Proceedings: VAH's formal
announcement it is entering voluntary administration proceedings
follows the exhaustion of all potential sources of funding as it
faced substantial liquidity stress due to the COVID-19 shutdown. A
third party could purchase the airline as part of the process and
allow it to remain the second carrier in Australia, but Fitch
believes VAH's balance sheet will undergo inevitable restructuring
and creditors will likely have to take a haircut on outstanding
debt. Its downgrade of VAH's rating to 'D' reflects the increased
probability of this occurring.
Coronavirus-Related Impact: Liquidity stress was unmanageable
following quarantine measures that effectively prohibit all
non-essential travel between cities in Australia. VAH suspended
international operations and all domestic flights, aside from the
government-subsidised minimum domestic network. As a result, VAH's
cash flow has been limited since March 2020 and it has to date been
unable to secure fresh third-party financial support to ensure it
is able to survive the duration of the travel restrictions and
subsequent return of confidence to travelling in Australia once
they are lifted.
Reset of Strategy: VAH's restructuring would need to result in the
airline's profitability and cash generation improving in order to
secure financing from a third party and enable the airline to
continue as a going concern. Fitch believes that, in this case, the
airline will focus on bringing back profitable routes and
realigning its cost structure to its revenue base while in
administration. In its view, the airline and potential third-party
new owners will be committed to taking the necessary action to
achieve these goals to ensure the airline's financial profile can
support its ongoing operations.
DERIVATION SUMMARY
The rating has been downgraded to 'D' as the company has entered
voluntary administration.
KEY ASSUMPTIONS
Fitch's Previous Key Assumptions Within its Rating Case for the
Issuer Included:
- COVID-19-related assumptions: Domestic available seat
kilometers (ASK) to reduce by over 90% in the fourth quarter of the
financial year ending June 2020 (FY20). ASK capacity cuts to reduce
during 1HFY21, with load factors and prices to recover towards FY19
levels by FY22. Domestic ASK to reflect FY19 levels in FY22
- International ASK to reduce by 100% in 4QFYE20. ASK capacity to
gradually recover from December 2020, but overall ASK to remain
below historical levels. Load factors and prices to recover to FY19
levels from FY22.
- Associated cost savings from grounding of aircraft to be
achieved, with aircraft returning to service in 1HFY21 in line with
ASK reinstatements.
- Group capacity to expand by low single digits in FY23 across
all group airlines, with group-wide load factors to improve to
around 82.5% by FY23.
- Velocity revenue to fall by 60% in FY21 and increase to
historical levels from FY22.
- Jet fuel requirements to move in line with changes in ASK.
Prices are based on Gulf Coast Jet Fuel Platts swap prices from
September 2019 to February 2023.
- VAH to realise guided annual AUD75 million in employee cost
savings and other supplier savings by FYE21.
- Capex of AUD400 million in FY20, AUD326 million in FY21, AUD367
million in FY22 and AUD367 million in FY23.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Fitch will rate VAH following its exit from the administration
proceedings based on its new strategy and financial profile.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- The rating cannot be downgraded from 'D', as this is the lowest
rating on the scale.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Administration Entered to Secure Liquidity: VAH's liquidity
stresses led to it entering voluntary administration. Fitch expects
the administrators to work towards securing third-party financing
to shore up the airline's ongoing financial profile. As part of the
restructuring, Fitch expects creditors to be required to take a
haircut on outstanding debt.
VIRGIN AUSTRALIA: S&P Lowers ICR to 'CC', Outlook Negative
----------------------------------------------------------
S&P Global Ratings, on April 21, 2020, lowered its issuer credit
rating on Virgin Australia to 'CC' from 'CCC', and lowered its
related issue ratings on the airline's unsecured debt to 'C' from
'CCC-'. The recovery ratings on the unsecured debt remain unchanged
at '5'. S&P also removed all ratings from CreditWatch, where they
were placed with developing implications on March 26, 2020.
S&P said, "We lowered the issuer credit ratings on Virgin Australia
to 'CC' because we expect that the company's unsecured debt
providers will be forced to accept less value for amounts owing
under the terms of the existing unsecured debt facilities as part
of the proposed debt restructuring and recapitalization process. If
unsecured debt providers are forced to accept less value for
amounts owing under their debt facilities, it will constitute a
default under our criteria.
"However, we expect that a debt restructuring should facilitate a
recapitalization of the company, which should enable Virgin to
emerge from the restructuring and continue as Australia's
second-largest domestic airline.
"We also note that while Virgin Australia owns the Velocity
Frequent Flyer business, it has not been placed into voluntary
administration and is a separate entity."
Virgin Australia's credit quality has deteriorated following
intensifying pressure on the airline's cash outflow and liquidity
due to government-led COVID-19-related restrictions.
Environmental, Social, and Governance (ESG) Credit Factors for this
rating change:
-- Social Management Factors
S&P said, "The negative outlook reflects our expectation that we
will lower the issuer credit rating to 'SD' (selective default) and
the issue rating to 'D' if the debt restructuring occurs as
anticipated.
"We will reevaluate the issuer credit rating and issue-level
ratings, including our recovery ratings, once the terms of the
recapitalization are known and the restructuring is completed."
VIRGIN AUSTRALIA: Shareholder Threatens to Sack 2,000 Workers
-------------------------------------------------------------
Tom Place at Daily Mail Australia reports that a Chinese
shareholder of Virgin Australia has threatened to fire 2,000 local
workers of its ground services subsidiary if the federal government
does not pay the company $125 million.
According to the report, Chinese investment group HNA, a 20 per
cent owner of Virgin Australia which went into voluntary
administration on April 21, also owns Swissport which provides
services such as baggage handling.
Swissport released a list of Virgin staff on April 21 who are at
risk of losing their jobs unless the the federal government
extended a $125 million lifeline.
Swissport warned it could also be forced to liquidate assets at
airports such as Newcastle according to the Daily Telegraph.
Daily Mail Australia says HNA has been trying to sell Swissport to
cut its massive debts, which totalled $149 billion in 2017 after
borrowing to purchase a stake in Deutsche Bank New York real
estate, a computer distributor and a hedge fund.
According to Daily Mail Australia, Swissport executive vice
president Asia-Pacific Glenn Rutherford said the actions of its
parent company would not impact their decisions.
Swissport ANZ itself is a guarantor to almost $1.4 billion of group
loans but Mr Rutherford said he still expects the company to
receive support from the government, the report relays.
The report relates that Transport Minister Michael McCormack said
he was 'happy to hear them out' in an upcoming meeting on April 17
but reinforced the government would not bail out a foreign
company.
'You can't apply one principle to Virgin and a different principle
to another company in the same industry,' the report quotes Mr.
McCormack as saying.
Mr. McCormack also criticised Virgin's billionaire founder Sir
Richard Branson for not speaking up sooner.
'Until Tuesday, I hadn't heard him say anything,' he said.
On April 21, Sir Richard sent a message of encouragement to the
airline's 10,000 workers on Instagram, the report notes.
While many were uplifted by Sir Richard's words of praise for
staff, many slammed him for taking aim at the Australian government
for failing to use taxpayer money to bail the airline out of debt,
Daily Mail Australia says.
About Virgin Australia
Brisbane, Queensland-based Virgin Australia is Australia's
second-largest airline. It commenced services in 2000 as Virgin
Blue, wholly owned by the Virgin Group.
As reported in the Troubled Company Reporter-Asia Pacific on April
22, 2020, Bloomberg News related that Virgin Australia Holdings
Ltd. became Asia's first airline to fall to the coronavirus after
the outbreak deprived the debt-burdened company of almost all
income. Administrators at Deloitte, who have taken control of the
Brisbane-based carrier, aim to restructure the business and find
new owners within months. More than 10 parties have expressed an
interest, Deloitte related on April 21.
According to Bloomberg, Virgin Australia, which has furloughed 80%
of its 10,000 workers, will continue to operate some flights for
essential workers, freight and the repatriation of Australians. The
airline's frequent flyer program is a separate company and is not
in administration.
ZAM GC: First Creditors' Meeting Set for May 1
----------------------------------------------
A first meeting of the creditors in the proceedings of Zam GC Pty
Ltd, trading as Zambrero Garden City, will be held on May 1, 2020,
at 10:30 a.m.
Facility details: 1-800-062-923
Password: 784859517874#
Michael Caspaney of Menzies Advisory was appointed as administrator
of Zam GC on April 21, 2020.
=========
C H I N A
=========
CONCORD NEW: Fitch Alters Outlook on 'BB-' LT IDR to Negative
-------------------------------------------------------------
Fitch Ratings has revised the Outlook on China-based Concord New
Energy Group Limited's Long-term Foreign-Currency Issuer Default
Rating to Negative from Stable and affirmed the rating at 'BB-'.
Fitch has also affirmed CNE's senior unsecured rating and the
rating on its USD200 million 7.9% bonds due January 2021 at 'BB-'.
The Outlook revision reflects increased uncertainty about the
timing and success of CNE's refinancing of the US dollar
denominated bonds under the currently volatile market condition and
slower-than-expected deleveraging in 2019. Fitch expects to revise
the Outlook back to Stable, if CNE secures funds sufficient to
repay the bonds, through successful refinancing or asset sales, in
the next six months while remaining on track to reduce leverage.
Fitch expects CNE's FFO net leverage to have decreased only
slightly to 6.6x in 2019 from 6.7x in 2018, which remained higher
than its previous forecast of 6.0x. Fitch forecasts FFO net
leverage to improve to around 6.0x in the next two years.
Fitch believes CNE can refinance its US dollar bonds due in January
2021 through issuance of new bonds, once market conditions
stabilise. However, when that will be is uncertain. More asset
sales can also alleviate refinancing pressure, but Fitch has only
factored in CNY2.7 billion from management's target to sell 350MW
of capacity in 2020 in its base case, due to lower visibility on
timing and valuation of asset sales above this level.
KEY RATING DRIVERS
Stable Operation in 2019: Utilisation of wholly owned wind farms
fell 0.5% yoy to 2,277 hours in 2019 while that of solar farms
improved by 11% to 1,505 hours. The consolidated wind farms'
realised tariff fell 2.5% to CNY0.580/KWh in 2019 and that for
solar farms rose 0.7% to CNY0.914/KWh. The mild decline of the wind
farms' utilisation and tariff was in line with the industry
average. New capacity installation of 286MW in 2019 was below its
expectation, which was partly due to higher wind-turbine prices
last year. The operation and maintenance business continued to grow
healthily as revenue rose 26% to CNY121 million in 2019.
Slower Deleveraging in 2019: CNE deleveraged more slowly than
expected in 2019 partly because of lower capacity installation and
higher cash capex due to prepayments to secure wind turbines for
installations in 2020 and to settle construction payables from
previous years. Lower dividend income from joint ventures also
slowed down deleveraging in 2019. Fitch forecasts FFO net leverage
to improve to around 6.0x in 2020 and 2021 as Fitch expects capex
to normalise and dividend income to recover.
More Project Divestures: CNE disposed of 225MW of wind farms in
three deals last year, which were priced at an average
price-to-book ratio of 1.5x and generated CNY174 million in
investment gains. CNE has announced disposal of another 148MW of
capacity this year at a valuation of 1.2x book value. Divestures at
a premium prove the profitability and liquidity of CNE's project
portfolio. Fitch expects CNE to sell 300MW-350MW of capacity per
year, which will be a key source of funds for its annual new
installations of 600MW-650MW in the coming years.
Developing Grid-Parity Projects: CNE installed three grid-parity
wind power projects with total capacity of 149MW in 2019,
accounting for around half of its new installations in the year.
Fitch expects CNE to spend CNY3.4 billion in cash capex in 2020,
taking into account about 650MW of new capacity installation. CNE
has 398MW of wind power projects entitled to feed-in-tariffs (FiT)
in the pipeline, all of which will be completed in 2020. Fitch
estimates the outstanding capex payments for these subsidised
projects are around CNY1.8 billion in 2020, while the balance of
the capex budget is somewhat flexible and is dependent on the
progress of asset divestitures.
New projects to be installed after 2020 will be subsidy-free and
their return will largely depend on location and the wind or solar
resources. Development of grid-parity projects and divestures of
FiT ones will reduce CNE's reliance on renewable subsidies over
time. Fitch expects subsidies to fall to less than a quarter of
power revenue in three to four years if CNE sticks to the divesture
plan. Fitch projects CNE to spend CNY3.0 billion-3.5 billion of
capex per annum in 2021 and 2022.
DERIVATION SUMMARY
CNE's 'BB-' rating reflects its healthy project portfolio and lower
reliance on subsidies as a revenue source as it focuses on wind
power in China. Its leverage and coverage metrics are broadly
commensurate with a low 'BB' rating level.
CNE's credit profile is comparable to its Indian peer Greenko
Energy Holdings (Greenko, IDR: BB-/Stable) and ReNew Power Private
Limited (ReNew, IDR: BB-/Stable). Fitch's estimate for CNE's FFO
net leverage of 6.6x in 2019 is comparable with the 6.4x forecast
for Greenko for the end of the financial year to March 2020 (FY20).
CNE is likely to have a much stronger FFO fixed-charge coverage of
around 2.7x in 2020 compared with the forecast 1.7x of Greenko and
1.5x of Renew in FY21, due to its lower funding cost. CNE's smaller
scale compared to Greenko is somewhat balanced by its lower
counterparty risk. The weak credit profiles of Greenko's and
Renew's key customers - state-owned power distribution utilities -
constrain their ratings. In comparison, CNE derives revenue from
strong state-owned power grids and government subsidies.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Stable capacity utilisation for existing capacities; higher
utilisation for grid-parity wind power projects installed in the
coming years, reflecting their locations in better wind resource
areas;
- Tariffs of existing wind farms to remain stable;
- Non-power generation revenue to grow around 20% per annum in
2020-2022;
- Annual net capacity addition (divested capacity subtracted from
installed capacity) of 300MW in the next few years;
- Annual capex of CNY3.0 billion-3.4 billion in 2020-2023;
- Annual dividend payment of CNY150 million-200 million in
2020-2023;
- Fitch adds back 50% of CNE's VAT bill on equipment investment
to EBITDA and funds from operations
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- The Outlook will be revised to Stable if CNE does not breach
negative sensitivities triggers within the next six months
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Failure to secure sufficient funds to address its US dollar
bond maturity in January 2021 within the next six months
- FFO net leverage higher than 6.0x on a sustained basis
- FFO fixed-charge coverage lower than 2.5x on a sustained basis
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Refinancing of USD Bonds is Key: CNE had CNY1.46 billion of readily
available cash at end-2019, enough to cover short-term debt of
CNY971 million. Fitch forecasts that CNE's CFO of CNY551 million in
2020, existing cash and expected proceeds from project divestures
should be sufficient to cover the equity capital component of its
capex and project-level debt amortisation in 2020. Fitch expects
that 70% of the CNY3.4 billion capex for 2020 can be easily
financed by project loans or financial leasing. CNE will need to
refinance its USD200 million bond due in January 2021 through the
issuance of new US dollar bonds or more project divestures.
SUMMARY OF FINANCIAL ADJUSTMENTS
VAT Deduction: Wind and solar farms enjoy a 50% VAT rebate as an
incentive for supplying renewable energy. Wind farms' revenue is
net of VAT and only the 50% rebate is reflected in the income
statement and included as EBITDA. Wind farms are exempt from VAT in
the first five operating years, during which they do not pay VAT or
receive rebates. The amount of VAT that has been exempted, although
100% retained by wind farms, is not reflected in the income
statement. Fitch has adjusted CNE's EBITDA by adding 50% of the VAT
that has been exempted.
External Guarantee: CNE continues to provide a guarantee on a bank
loan of a project it sold to an overseas renewable fund last year.
Fitch includes 50% of the guaranteed amount in the calculation of
CNE's leverage because repayment of the loans is well covered by
the projects' operating cash flow.
UNION LIFE: Moody's Reviews Ba1 Unsec. Debt Rating for Downgrade
----------------------------------------------------------------
Moody's Investors Service has placed on review for downgrade the
Baa3 insurance financial strength rating and Ba1 senior unsecured
debt rating of Union Life Insurance Co., Ltd. The outlook has been
changed to ratings under review from stable.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR
DOWNGRADE OF THE RATINGS
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. Union Life has been
one of the companies affected by the shock given its elevated risky
asset exposure, weaker-than-peer capital buffer and increasing
refinancing and liquidity risks. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the
substantial implications for public health and safety. Its action
reflects the impact on Union Life of the breadth and severity of
the shock, and the deterioration in credit quality it has
triggered.
Union Life has significant exposure to alternative investments. In
particular, its exposure to trust products has been increasing over
the past two years, with some of the underlying assets comprising
loans for financing real estate projects. Some of these largest
investments represent material concentration risk relative to the
insurer's shareholders' equity. The risk of these investment is
evident by the material impairment charges taken by the insurer in
2019 for one of its defaulted trust products. In addition, the
disruption to China's economy due to coronavirus outbreak could add
to the risks of these investments and bring credit and liquidity
risks to Union Life.
In addition, the insurer's $500 million senior unsecured debt,
which accounted for around 3% of its total assets as of end of H1
2019, will mature in September 2021. Market conditions remain
challenging for the insurer to refinance the debt, or to sell its
USD assets, some of which are in illiquid assets like real estate,
and/or obtain USD funding to repay the debt. This is despite that
the fact that the insurer is in progress to repurchase 10% of its
debt.
The insurer's solvency has declined in recent years and has been
weak, standing at 175% at the end of 2019, which only provides a
thin buffer when considering high risky asset exposure. The
insurer's subdued and volatile earnings have constrained its
capital replenishment in the past few years. In addition, limited
progress has been made in introducing new strategic investors to
boost its capitalization.
While headquartered in Wuhan, Union Life's exposure to the city in
terms of premium income is not particularly high. While Moody's
expects the direct financial impact from the increase in claims
from the coronavirus outbreak will be manageable, the subsequent
business disruption to the insurance industry could slow down the
insurer's new business sales in 2020 while the slowdown of China's
economic activity could further weaken the asset quality of its
investments.
Offsetting these credit challenges is the high proportion of
renewal premiums that helps stabilize its premium income. The
insurer has also continued its efforts to improve its product mix
and profitability, although weak economic growth and intense
competition would slow the pace of improvement.
The review will focus on (1) the insurer's refinancing or repayment
plans for its USD senior unsecured debt maturing September 2021,
(2) the asset quality of its investments amid the material slowdown
in economic growth, (3) its capital adequacy and capital management
policy including any plans for capital replenishment; and (4) its
outlook on premium sales and profitability.
Given the review for downgrade, an upgrade is unlikely. The ratings
could be confirmed if the insurer: (1) executes a comprehensive
refinancing or repayment plan for its maturing debt, thereby
reducing refinancing risk, (2) improves its capitalization
significantly, with its comprehensive solvency ratio consistently
above 180%, and/or (3) reduces its risky asset exposure,
particularly in real estate, trust plans and equity-type
investments.
On the other hand, the ratings could be downgraded if: (1) there is
no solid refinancing or repayment plan for the maturing senior
unsecured debt, exacerbating liquidity risk, (2) its comprehensive
solvency ratio falls consistently below 180%, which could be driven
by further impairment charges on investment assets, (3) its
high-risk asset ratio remains consistently above 350%, while it
maintains a high investment concentration risks, (4) its earnings
coverage falls consistently below 1.5x, and/or (5) there is
significant reduction in premium growth and its profitability.
The principal methodology used in these ratings was Life Insurers
Methodology published in November 2019.
Union Life Insurance Co., Ltd, headquartered in Wuhan, Hubei
province of China, offers traditional, participating, and accident
and health insurance products in China. As of the end of June 2019,
its total assets were RMB98.8 billion and shareholders' equity was
RMB6.4 billion.
XINYUAN REAL ESTATE: S&P Affirms 'B-' LongTerm ICR, Outlook Stable
------------------------------------------------------------------
S&P Global Ratings affirmed its 'B-' long-term issuer credit rating
on Xinyuan Real Estate Co. Ltd. and the 'CCC+' issue rating on the
company's outstanding senior unsecured notes.
S&P said, "We affirmed the issuer credit rating with stable outlook
to reflect our view that Xinyuan would be able to source sufficient
funding over the next three to six months to repay its coming
offshore debt maturities.
"In our view, the company has some highly feasible financing
options to handle the coming maturities. These include raising
loans by pledging various projects within and outside China."
Xinyuan has US$300 million senior notes due in November 2020 and
US$260 million senior notes due in February 2021.
Xinyuan's consistently high short-term debt balance and tight
liquidity will increase the company's refinancing risk. However,
the risk should be manageable if Xinyuan can secure new funding by
pledging projects. As of Dec. 31, 2019, the company has a
short-term debt balance of Chinese renminbi (RMB) 10.5 billion,
accounting for close to 50% of the total debt. The weighted average
maturity has also decreased to 1.8 years from 2.0 years given the
imminent bullet maturities. S&P has revised its assessment of the
company's capital structure to negative from neutral due to the
above factors.
S&P said, "We expect Xinyuan's liquidity to remain stretched unless
the company's sales performance improves significantly. We believe
Xinyuan has a reasonable chance of achieving its sales target of
RMB20 billion–RMB22 billion for 2020. This is based on our
expectation that the company will resolve soon some long standing
issues associated with its projects in Northern China. We estimate
Xinyuan's ratio of liquidity sources to uses to remain at 0.8x-0.9x
over the 12 months ending December 2020.
"In our opinion, Xinyuan has the flexibility to obtain new
financing in the next few months given its vast land bank." As of
Dec. 31, 2019, the company has land reserves of 4.5 million square
meters in China, mostly tier-two or tier-one cities, where property
demand is generally strong. Pledging the land bank in cities such
as Zhengzhou, Beijing, or Qingdao can bring immediate funding.
Xinyuan also has projects in the U.S., the U.K., and Malaysia. The
projects in New York City are more readily available for further
financing because some of them are already ready for sale or
mid-way to completion.
Xinyuan's cash level may also be a source for offshore debt
repayments. The company has RMB5 billion in unrestricted cash as at
end-2019. S&P understands Xinyuan has channels to remit cash
offshore. It has already repaid its US$130 million notes
outstanding in March this year.
S&P said, "The stable outlook reflects our view that Xinyuan will
be able to source sufficient refinancing to manage its debt
maturities over the next three to six months. This is despite tight
liquidity and a weak capital structure. The company's debt
maturities include US$300 million in senior notes due in November
2020 and US$260 million in senior notes due in February 2021.
"The outlook also reflects our view that Xinyuan can achieve its
targeted contracted sales in the next 12 months, generating steady
cash inflow.
"We could lower the rating on Xinyuan if the company faces
difficulties or delays in raising sufficient new capital within the
next three months to repay debt.
"We may also lower the rating if Xinyuan's liquidity weakens
further, such that we believe its capital structure is no longer
sustainable. This could stem from significant slippage in
contracted sales, or refinancing difficulties in any of the funding
channels. Material cash depletion or a sharp increase in funding
costs could signal such deterioration.
"Although less likely, we may upgrade Xinyuan if its liquidity and
capital structure improve such that the ratio of liquidity sources
to uses is sustainably above 1.2x. In particular, the ratio of cash
covering short-term debt will need to significantly improve. At the
same time, we would also expect Xinyuan to improve its debt
maturity profile such that weighted average maturities lengthen to
stably above 2.0 years. The company's leverage and EBITDA interest
coverage will also need to remain stable."
=========
I N D I A
=========
ADINATH AGRO: Ind-Ra Assigns 'BB' LT Issuer Rating, Outlook Stable
------------------------------------------------------------------
India Ratings and Research (Ind-Ra) has assigned Adinath Agro
Processed Foods Private Limited (Adinath Agro) a Long-Term Issuer
Rating of 'IND BB'. The Outlook is Stable.
The instrument-wise rating actions are:
-- INR144 mil. (outstanding as of January 31, 2020) Term loan due
on February 1, 2034, assigned with IND BB/Stable rating; and
-- INR135 mil. Fund-based working capital limits assigned with
IND BB/Stable/IND A4+ rating.
KEY RATING DRIVERS
The ratings reflect Adinath Agro's low revenue base due to its
small scale of operations. The revenue raised 7.8% YoY in FY19 to
INR802 million, due to an increase in the quantum of sales to 19.14
million kg (FY18: 17.42 million kg). Ind-Ra expects the company to
have witnessed stagnant revenue growth in FY20, based on the
10MFY20 revenue of INR693.2 million. Also, the revenue growth is
likely to be deferred for a couple of quarters in FY21 due to the
impact of the COVID-19 outbreak. The company is also susceptible to
the risk of product concentration, with tomato ketchup and sauces
contributing 70% to the revenues.
The rating factor in the company's limited bargaining power in new
markets, owing to intense competition in the ketchup and sauce
market in India. The same is reflected in its thin and declining
EBITDA margins of 4.3% in FY19 (FY18: 5.6%, FY17: 9.9%), which is
mainly contributed by the costs involved in market penetration. The
company penetrated into five new states in FY18 and three new
states in FY19. The company achieved an EBITDA margin of 6% in
10MFY20 and the management expects to achieve a margin of 10% by
FY22, driven by the stabilization of operations in the new markets
penetrated into. The ROCE stood at a negative 1% in FY19.
The ratings further factor in the company's weak credit metrics. In
FY19, interest coverage (EBITDA/gross interest coverage)
deteriorated to 1.9x (FY18: 2.7x) and net financial leverage to
7.7x (4.7x), due to an increase in debt to INR313 million (INR234
million) and interest expenses. During 10MFY20, the interest
coverage remained stable at 1.8x and gross financial leverage stood
at 5.7x due to an improvement in absolute EBITDA. Ind-Ra expects
the credit metrics to improve gradually as the company has no major
debt-led CAPEX plans for the near term.
Liquidity Indicator - Stretched: Adinath Agro's average fund-based
working capital limit utilization was on a higher side at 89% for
the 12 months ended January 2020. The company's operations are
working capital intensive, as reflected in its long working capital
cycle of 149 days in FY19 (FY18: 166 days). The improvement in the
cycle is attributed to lower inventory days. The cash flow from
operations (after interest) turned positive at INR18 million in
FY18 and was INR15 million in FY19. Also, the free cash flows were
negative from FY17 to FY19 on account of the CAPEX incurred for the
expansion of capacities. Ind-Ra expects the company's free cash
flows to turn positive in FY20 in the absence of any CAPEX plan.
The ratings, however, are supported by Adinath Agro's diversified
customer base with the top 10 customers and suppliers contributing
approximately 50% to the revenues and purchases, respectively.
Also, the company's reliance on a single customer or supplier is
between 1% and 10% of the total revenue and purchases,
respectively.
The ratings are also supported by the promoter's experience of more
than 30 years in the industry.
RATING SENSITIVITIES
Negative: Significant deterioration in the revenue or EBITDA margin
and/or elongation of the working capital cycle leading to
deterioration in the credit metrics on a sustained basis would be
negative for the ratings.
Positive: An improvement in the revenue and EBITDA margin leading
to net leverage reducing below 4x on a sustained basis will be
positive for the ratings.
COMPANY PROFILE
Adinath Agro was incorporated in 1995 in Pune. It manufactures
various food products, such as tomato ketchup and sauces, Chinese
and continental sauces, fruit jams, canned food, pickles, papad,
and noodles under the brand name of Surabhi, Magic King, and Winn,
primarily serving to the states in southern and central India. The
company has two manufacturing facilities one each in Jejuri (Pune)
and Kolvihire (Pune). Adinath Agro's promoters are Rajesh Gandhi
and Nitin Gandhi.
B. MELARAM & SONS: ICRA Lowers Rating on INR7cr LT Loan to 'B'
--------------------------------------------------------------
ICRA has revised the ratings on certain bank facilities of B.
Melaram & Sons (BMS), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term fund- (7.00) [ICRA]B(Stable); Downgraded
based limit** from [ICRA]B+(Stable)
Short-term non-
fund based limit 40.00 [ICRA]A4; Reaffirmed
**Sub-limit of Short-term non-fund based limit
Rationale
The revision in long-term rating of BMS considers the decline in
profitability in FY2019 and 10M FY20201 resulting in stretched
interest coverage ratio in those years. The operations of BMS have
also been exposed to the cyclicality in the steel industry, because
of which there has been a reduction in the turnover in the current
fiscal. ICRA also notes the entity's reliance on the Letter of
Credit (LC)-backed creditors to fund its working capital
requirements, which has resulted in a high TOL/TNW2 ratio of 2.36
times as on January 31, 2020. The ratings are further constrained
by the intense competition in steel trading due to the fragmented
nature of the business entailing subdued profitability and the
entity's status as a partnership firm, which exposes it to the risk
of capital withdrawals by the partners, as evident in the past.
The ratings, however, take comfort from the extensive experience of
the promoters in the steel trading and shipbreaking businesses.
Key rating drivers and their description
Credit strengths
* Extensive experience of promoters in steel trading and
ship-breaking business: BMS was established by Mr. Melaram
Baijnath Agarwal in 1982 and was later taken over by his sons, Mr.
Vinodkumar M. Agarwal and Mr. Bhupendrakumar M. Agarwal. Both the
partners hold over two decades of experience in steel trading and
shipbreaking operations. The partners' extensive experience has
enabled the firm to establish healthy business relationships with
its suppliers and customers.
Credit challenges
* Weak profitability in FY2019 and 10M FY2020 and consequently
stretched interest coverage ratio: The profitability of BMS has
been weak due to the lack of value addition in the trading
business. The cost structure has weakened in FY2019 due to a rise
in the input costs, which has affected the profitability. The
operating profit stood at INR0.73 crore in FY2019, resulting in a
weak operating profit margin (OPM) of 0.76% in FY2019, which
declined from 2.76% in FY2018. The OPM continued to be low in 10M
FY2020, with an OPM of 0.63%. Low operating profitability has
resulted in weak interest coverage ratio of 0.38 time in 10M FY2020
(0.76 time in FY2019). Moreover, in the absence of a natural
hedging mechanism, profitability remains vulnerable to foreign
exchange fluctuations as the firm imports most of its traded
goods.
* Exposure to cyclicality associated with steel industry; turnover
declined in 10M FY2020: BMS' operations and profitability are
vulnerable to the cyclicality inherent in the steel trading
business. The impact of fluctuation in global as well as domestic
demand and prices has been visible in the topline movement of the
firm over the past five years. The sales volume has declined in
FY2020, with a considerable decline in turnover at INR55.48 crore
till January 31, 2020.
* Reliance on LC-backed creditors to fund its working capital
requirements: The usage of fund-based facilities for procuring
metals has been limited and the firm relies largely on its
suppliers to fund the operations. It enjoys a credit of 90-180 days
on it LC-backed purchases, which has kept the TOL/TNW high at 3.07
times as on March 31, 2019. Even though the said ratio declined as
on January 31, 2020, it continued to stay high at 2.36 times.
* Intense competition in steel trading due to fragmented nature of
business: The steel trading industry is fragmented, given the low
entry barriers and limited complexity of work involved. The entity
faces stiff competition not only from the organised players, but
also from numerous unorganised players.
* Risk related to partnership nature of the firm: BMS being a
partnership firm, any significant withdrawals from the capital
account by its partners could impact its net worth. The capital
withdrawals in FY2018 along with the net loss in the consecutive
year have led to erosion in net worth, which stood at INR9.37 crore
as on March 31, 2019 (as compared to INR11.77 crore as on March 31,
2017).
Liquidity position: Stretched The liquidity profile of the company
has remained stretched due to weak cash accruals over the past two
years. Consequently, the creditors were stretched to support the
liquidity, leading to negative working capital intensity. Going
forward, the revenues are expected to remain moderate in the near
term, given the weak demand expected in the domestic steel
consumption. Nonetheless, the absence of any long-term loan
repayments provides some comfort.
Rating sensitivities
* Positive triggers: An upward movement in rating could take place
if there is sustained revenue growth coupled with improvement in
profitability leading to improved liquidity and comfortable
coverage indicators.
* Negative triggers: Negative pressure on the rating could arise
if there is any further decline in profitability as well as
turnover leading to deterioration of liquidity.
Established in 1980, BMS is a partnership concern that trades in
ferrous products like hot rolled (HR) coils, HR plates and sheets,
HR alloys, etc. The firm is also involved in ship-breaking, which
was discontinued from FY2013 due to the slowdown in the industry.
Baijnath Melaram (rated [ICRA]BB(Stable)/[ICRA]A4+ in January 2020)
is the associate concern of BMS, which deals in ship-breaking
operations.
BMS recorded a net loss of INR0.35 crore on an operating income
(OI) of INR95.52 crore in FY2019 and a net profit (excluding
depreciation) of INR0.11 crore on an OI of INR55.48 crore for the
10-month period ended January 31, 2020 (provisional numbers).
BISCON TILES: ICRA Reaffirms B Rating on INR4.87cr Term Loan
------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Biscon
Tiles LLP (BTL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Term Loan 4.87 [ICRA]B (Stable); reaffirmed
Cash Credit 2.50 [ICRA]B (Stable); reaffirmed
Rationale
The reaffirmation in the ratings factors in BTL's below-average
financial risk profile, marked by the nascent stage of the firm's
operation, a leveraged capital structure, below-average debt
coverage indicators and high working capital intensity. The ratings
also factor in the intense competition in the tile industry and the
vulnerability of the profitability to volatility in raw material
and fuel prices. ICRA also considers the exposure of the company's
operations and cash flows to the cyclicality in the real estate
industry (the main end-user sector). ICRA also notes the impact of
COVID-19 and other aligned regulatory restrictions and continues to
monitor pendemic's impact on the company's operations in case of
prolongation of existing conditions.
The ratings, however, favorably factor in the adequate experience
of the partners in the ceramic tiles industry. Further, the ratings
draw comfort from the company's proximity to raw material sources
by virtue of its presence in Morbi (Gujarat) and the increase in
its operating income (OI), post the stabilisation of operations in
the current fiscal.
The Stable outlook on the [ICRA]B rating reflects ICRA's opinion
that the firm will continue to benefit from the extensive
experience of its promoters in the tiles industry.
Credit strengths
* Extensive experience of promoters in ceramic industry: The key
promoters, Mr. Jagdish Dadhaniya, Mr. Bharat Ghodasara and Mr.
Prakash Patel, have extensive experience in the ceramic industry
vide their association with another entity in a similar business
line. The firm will also benefit from the established marketing and
distribution network of its associate concern.
* Location-specific advantage: The location of the firm's
manufacturing facility in the ceramic tiles manufacturing hub of
Morbi enables it to procure quality raw materials at competitive
prices and save on transportation cost.
Credit challenges
* Moderate scale of operation; intense industry competition: BTL
commenced its operations in February 2019. The firm reported a
revenue of INR0.66 crore in FY2019. The firm's operation has scaled
up, post stabilisation of operation, as reflected from the revenues
of ~INR18.82 crore in 11MFY2020. However, the overall scale of
operation remains small, with revenue estimated at ~INR20 crore by
the end of fiscal FY2020. The firm temporarily closed its
operations to comply with the COVID-19 lockdown. Hence, its overall
operations and sales will get negatively impacted in Q1FY2021.
Further, the firm faces intense competition from established tile
manufacturers as well as unorganised players, which limits its
pricing flexibility.
* Below-average financial risk profile: The firm's financial risk
profile remains below-average, marked by leveraged capital
structure and below-average debt coverage indicators. The capital
structure is likely to remain leveraged, with an estimated gearing
of 1.65 times and TOL/TNW of 1.95 times in FY2020. The
debt-coverage indicators are also likely to remain average with
TD/OPBDITA of 3.88 times.
* Profitability susceptible to intense competition and cyclicality
in real estate industry: The ceramic tile manufacturing industry
is fragmented, which results in intense competition and exerts
pressure on the profit margins. Further, the real estate industry
is the major consumer of ceramic tiles and hence BTL's
profitability and cash flows are likely to remain vulnerable to the
cyclicality in the real estate industry.
* Vulnerability of profitability and cash flows to cyclicality in
real estate industry: The real estate industry is the key end user
of tiles. Hence, BTL's profitability and cash flows are likely to
remain vulnerable to the inherent cyclicality of the industry.
* Vulnerability of profitability to fluctuations in raw material
and fuel costs: Raw material and fuel are the two major
manufacturing cost components that determine the cost
competitiveness of a player in the ceramic industry. Since BTL has
limited control over key input prices such as those of raw material
and fuel, adverse movements in raw material and gas prices can
expose its profitability to fluctuations.
Liquidity position: Stretched
BTL's liquidity position is stretched as the scheduled repayments
in FY2020 and FY2021 are expected to tightly match the cash
accruals. Also, the limited cushion available in working capital
limit along with the estimated adverse impact on working capital
cycle amid the COVID-19 lockdown can exert pressure on the
liquidity. The average utilisation of working capital limit
moderated at ~73% over the past 12 months (March 19-February 20).
The promoters infused capital of INR0.63 crore and unsecured loan
of INR0.31 crore in the current fiscal, which are expected to
support the liquidity to some extent.
Rating sensitivities
Positive triggers:
* Sustained improvement in revenue and profitability, leading to
improvement in key credit metrics.
* Strengthening of net worth, leading to improvement in capital
structure and working capital cycle.
Negative triggers:
* Substantial decline in scale of operations or erosion in
operating margins.
* Any large debt-funded capex or stretch in working capital cycle
adversely impacting the liquidity profile and other key credit
metrics.
Established in February 2018, BTL manufactures glazed wall tiles in
the size of 300x200 mm and 300x300mm. The unit is located at Bela,
Morbi and has an estimated installed capacity of producing ~36,000
MT of tiles annually. The firm commenced its commercial operations
on February 2019. The partners have adequate experience in the
ceramic industry vide their association with another entity.
BLUE DUCK: Ind-Ra Lowers LongTerm Issuer Rating to 'D'
------------------------------------------------------
India Ratings and Research (Ind-Ra) has downgraded Blue Duck
Textiles Private Limited's Long-Term Issuer Rating to 'IND D
(ISSUER NOT COOPERATING)' from 'IND BB- (ISSUER NOT COOPERATING)'.
The issuer did not participate in the rating exercise despite
continuous requests and follow-ups by the agency. Thus, the rating
is based on the best available information. Therefore, investors
and other users are advised to take appropriate caution while using
these ratings.
The instrument-wise rating actions are:
-- INR60.00 mil. Fund-based working capital limit (long-
term/short-term) downgraded with IND D (ISSUER NOT
COOPERATING) rating; and
-- INR18.36 mil. Term loan (long-term) downgraded with IND D
(ISSUER NOT COOPERATING) rating.
Note: ISSUER NOT COOPERATING: Issuer did not cooperate; based on
the best available information
KEY RATING DRIVERS
The downgrade reflects delays in debt servicing by the company,
according to the information put out in the public domain by
another rating agency.
RATING SENSITIVITIES
Positive: Timely debt servicing for at least three consecutive
months will be positive for the ratings.
COMPANY PROFILE
Incorporated in 2013, Blue Duck Textiles is engaged in the dyeing
and printing of fabrics.
CHHABRA ISPAT: Ind-Ra Affirms BB+ LT Issuer Rating, Outlook Stable
------------------------------------------------------------------
India Ratings and Research (Ind-Ra) has affirmed Chhabra Ispat Pvt
Ltd's (CIPL) Long-Term Issuer Rating at ‘IND BB+’. The Outlook
is Stable.
The instrument-wise rating actions are:
-- INR3.25 mil. (reduced from INR5.85 mil.) Term loans due on
June 2021 affirmed with IND BB+/Stable rating;
-- INR190 mil. (increased from INR180 mil.) Fund-based working
capital limits affirmed with IND BB+/Stable rating;
-- INR122 mil. (increased from INR82 mil.) Non-fund-based working
capital limits affirmed with IND A4+ rating;
-- INR10 mil. Proposed fund-based working capital limits assigned
with Provisional IND BB+/Stable rating; and
-- INR14.75 mil. Proposed non-fund-based working capital limits
assigned with a Provisional IND A4+ rating.
KEY RATING DRIVERS
The affirmation reflects CIPL's continued medium scale of
operations, with revenue of INR1,798.13 million in FY19 (FY18:
INR1,453.58 million). The revenue increased due to an increase in
demand for iron and steel products. The company achieved a topline
of INR1,644.30 million during 11MFY20.
The ratings also factor in the CIPL's moderate credit metrics due
to modest EBITDA margins. The metrics improved on account of an
increase in absolute EBITDA to INR51.70 million in FY19 (FY18:
INR39.88 million), backed by revenue growth, and scheduled
repayment of its long-term debt. The gross interest coverage
(operating EBITDA/gross interest expense) was 1.76x in FY19 (FY18:
1.56x) and the net financial leverage (total adjusted net
debt/operating EBITDAR) was 4.18x (5.47x). Moreover, CIPL's gross
interest coverage and net financial leverages were 1.94x and 5.19x,
respectively, during 11MFY20.
Liquidity Indicator – Poor: CIPL registered almost full
utilization, along with a single instance of over-utilization, of
its fund-based working capital limit during the 12 months ended
March 2020. However, the over-utilization instance was regularized
within two days. The company's cash flow from operations declined
to INR2.97 million in FY19 (FY18: INR14.13 million) owing to an
increase in working capital requirements as well as interest
expenses. Consequently, CIPL's free cash flow also declined to
INR2.97 million in FY19 (FY18: INR11.28 million). However, the net
cash cycle improved to 49 days in FY19 (FY18: 87 days) on account
of a decline in average inventory days. Additionally, the company
had unencumbered cash of INR0.88 million in FY19 (FY18: INR0.97
million). Furthermore, CIPL does not have any capital market
exposure and relies on banks and financial institutions to meet its
funding requirements.
The ratings are also constrained by CIPL's modest EBITDA margins
due to intense competition in the iron and steel industry. The
margin rose slightly to 2.88% (FY18: 2.74%) because of a fall in
the cost of operations. The return on capital employed stood at 9%
in FY19 (FY18: 7%). During 11MFY20, CIPL recorded an operating
margin of 2.40%.
The ratings are, however, supported by the founders' experience of
over a decade in the manufacturing and trading of MS billets.
RATING SENSITIVITIES
Negative: Any decline in the revenue, leading to deterioration in
the overall credit metrics and/or deterioration in the liquidity
position, will be negative for the ratings.
Positive: A substantial improvement in the revenue, leading to an
improvement in the overall credit metrics, with the interest
coverage exceeding 2.5x, on a sustained basis, will be positive for
ratings.
COMPANY PROFILE
Incorporated in 2005, CIPL manufactures MS billets at its plant in
Burdwan, West Bengal. These billets are used by rolling mills to
manufacture thermos-mechanically treated bars.
The company's registered office is in Kolkata. It is managed by two
directors: Surendra Kumar Jain and Sourav Jain.
CREVITA GRANITO: ICRA Reaffirms B+ Rating on INR25.50cr Loan
------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Crevita
Granito Pvt. Ltd (CGPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund-based-
Term Loan 25.50 [ICRA]B+ (Stable); Reaffirmed
Fund-based-
Cash Credit 10.00 [ICRA]B+ (Stable); Reaffirmed
Non-fund Based-
Bank Guarantee 4.00 [ICRA]A4; Reaffirmed
Rationale
The reaffirmation of ratings continues to factor in CGPL's modest
scale of operations, with an average financial risk profile as
evident from its leveraged capital structure, average coverage
indicators and high working capital intensity. The ratings factor
in the intense competition in the ceramic industry and the exposure
of CGPL's profitability to volatility in raw material and fuel
prices. The ratings consider the exposure of the company's
operations and cash flows to the cyclicality in the real estate
industry (the main end-user sector). The ratings further note the
recent outbreak of Covid-19 and the subsequent lockdown leading to
shutdown of its operations.
The ratings, however, favourably factor in the experience of the
promoters in the ceramic industry. Further, the ratings draw
comfort from the company's location-specific advantage, which
ensures easy availability of raw materials.
The Stable outlook on the [ICRA]B+ rating reflects ICRA's opinion
that CGPL will continue to benefit from the extensive experience of
its promoters in the ceramic tiles industry.
Key rating drivers and their description
Credit strengths
* Extensive experience of promoters in ceramic industry: CGPL's
key promoters, Mr. Haresh Bopaliya, Mr. Paresh Detroja and Mr.
Mahendra Soriya, have more than seven years of experiences in the
ceramic industry through other associate entities that operate in
the same industry.
* Location-specific advantage: The location of the company's
manufacturing facility in the ceramic hub of Morbi (Gujarat)
provides easy access to quality raw materials at competitive prices
and saves on transportation cost.
* Credit challenges Moderate scale of operation with intense
industry competition: The company's scale of operation remains
moderate, as reflected by its operating income (OI) of INR45.82
crore in FY2019 and INR38.78 crore in 10M FY2020. Moreover, its
operations are adversely impacted by the temporary plant shutdown
following the risk of Covid-19. While the current lockdown is for
three weeks (March 25, 2020 to April 15, 2020), depending on the
spread of the virus, it could get extended further. The major
negative impact on sales and profitability is expected in Q1 FY2021
with construction activities stalled during the first half of
April-2020. Even if the lockdown is not extended, increased risk
aversion could result in labour shortage in the first quarter as
the return of the migrant labourers will be gradual. Further, the
intense competition from established tile manufacturers and
unorganised players limits CGPL's pricing flexibility.
* Average financial risk profile: CGPL's financial risk profile is
average, marked by a leveraged capital structure with gearing of
1.88 times in FY2019, though it improved from 2.12 times in FY2018.
The coverage indicators were also average in FY2019, with interest
coverage at 2.04 times, Total Debt/OPBDITA of 4.66 times and
NCA/Total Debt of ~11%.
* High working capital intensity: The company's working capital
intensity (NWC/OI) remained high at ~38% in FY2019 due to high
debtor days and inventory levels. CGPL provides an average credit
period of ~60-90 days to its domestic customers (i.e. dealers and
merchant exporters). Further, it receives a credit period of
~90-120 days from its suppliers. It maintains an inventory of
finished goods (usually around two months) to meet its client's
orders continuously.
* Vulnerability of profitability and cash flows to cyclicality in
real estate industry: The real estate industry is the key end-user
of tiles. Hence, CGPL's profitability and cash flows are likely to
remain vulnerable to the inherent cyclicality of the industry.
* Vulnerability of profitability to adverse fluctuations in raw
material and fuel prices: Raw material and fuel are the two major
cost components that determine the cost competitiveness of a player
in the ceramic industry. CGPL has limited control over the prices
of its key inputs, such as raw materials and piped natural gas
(PNG). Hence, the company's profitability, vulnerable to the
movements in raw material and gas prices, relies on its ability to
pass on any adverse movement to the customers.
Liquidity position: Stretched
CGPL's liquidity position is stretched, marked by impending debt
repayments, and limited cushion in working capital limit as evident
from high utilisation of ~97% during the past 15 months (November
2018 to January 2020).
Rating sensitivities
Positive triggers
* Significant scale up of operations coupled with increase in
profitability
* Improvement in working capital cycle Negative triggers
* Substantial decline in scale of operations or erosion in
operating margins
* Any large debt funded capex or stretch in working capital cycle
Incorporated in 2016, CGPL manufactures double charged vitrified
tiles with nano polishing. Its manufacturing unit is located in
Morbi, Gujarat, with an installed production capacity of 7,000
boxes of vitrified tiles per day. The company is managed by Mr.
Haresh Bopaliya, Mr. Paresh Detroja, Mr. Mahendra Soriya, Mr.
Vishal Sheashiya and Mr. Ravindra Aghara.
In FY2019, the company reported a net profit of INR1.15 crore on an
OI of INR45.82 crore, compared to a net profit of INR1.50 crore on
an OI of INR48.36 crore in the previous year.
CYBERWALK TECH: ICRA Reaffirms 'D' Rating on INR68.84cr Term Loan
-----------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Cyberwalk
Tech Park Private Limited (CTPPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long Term–Fund
Based–Term Loan 68.84 [ICRA]D; Reaffirmed
Rationale
The rating continues to factor in the delays in debt servicing by
CTPPL, given the inadequate cash flow generation in its single
ongoing commercial project. Given the sluggishness in the demand of
commercial space, CTPPL has been exposed to considerable market
risk, which has resulted in slowerthan-expected sales and leasing.
Going forward, the timely servicing of debt repayment commitments
and CTPPL's ability to lease/sell the remaining area at desired
prices and maintain its collection efficiency will remain the key
rating sensitivities. ICRA also notes the extensive experience of
the company's promoters in the real estate sector.
Key rating drivers and their description
Credit strength
* Extensive experience of promoters in real estate and other
businesses: The promoters of the company have a well-diversified
background. The Aarone Group (Aarone Promoters Pvt. Ltd), managed
by Mr. Yog Raj Arora and his family members, is a Delhi-based
real-estate development Group with a track record of over 28 years
in developing residential and commercial projects. Other promoters
of the Group also have significant experience in their own fields.
Credit challenges
* Delays in debt servicing because of inadequate cash flow
generation in project due to slowdown in real estate: CTPPL
developed the first phase of its real estate project named
Cyberwalk in FY2013, for which it availed a total debt of INR113
crore. Due to subdued sales, the cash flows generated by the
company were inadequate, leading to delay in debt servicing.
Despite the restructuring of debt in August 2016 and ballooning
nature of repayments, it has been making repayments with a lag. The
promoters have been funding the cash flow gaps. ICRA notes that the
debt levels have reduced in recent fiscals.
* Muted sales velocity with no sales in last three years: The
company has sold around 55% of its saleable area till
February 2017. However, there were no sales in the last three years
owing to the weak market conditions and absence of proper
connectivity, limited residential development and levy of toll
closer to the site.
Liquidity position: Poor
CTPPL's liquidity is poor as no sales were made in the last three
fiscals. This is characterised by the lag in repayments being made.
However, the Aarone Group has been infusing funds for the same.
Rating sensitivities
* Positive trigger: ICRA could upgrade CTPPL's ratings if the
company repays its debt obligations in a timely manner
on a sustained basis.
CTPPL (erstwhile Sofed Retailer Private Limited) was promoted as a
special purpose vehicle to set up an IT park at Manesar, Gurgaon.
At present, Aarone Promoters Private Limited (owned by the Aarone
Group) is the largest shareholder with a 70.58% stake, followed by
two other promoter groups from Chandigarh with a 14.71% stake each.
The IT park is titled Cyberwalk and is being developed in two
phases, with a total leasable/saleable area of 11.28 lakh sq ft.
While 8.8 lakh sq ft has been developed in phase one, the company
is yet to commence work on phase two.
In FY2019, the company reported a net loss of INR3.3 crore on
operating income (OI) of INR4.4 crore compared with a net loss of
INR3.1 crore on an OI of INR1.1 crore in the previous year.
EDWARD FOOD: ICRA Reaffirms C+ Rating on INR36cr Debentures
-----------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Edward
Food Research and Analysis Centre Limited (EFRAC), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Non-Convertible
Debenture
Programme 36.00 [ICRA]C+; Reaffirmed
Rationale
The reaffirmation of the rating considers EFRAC's highly stretched
liquidity position, relatively small scale of current operations
and a weak financial profile, characterised by significant cash
losses, an adverse capital structure and depressed coverage
indictors, witnessed during the past few years. ICRA notes that
cash accruals generated by EFRAC are still insufficient for meeting
its debt repayments, leading to dependence on external financing.
ICRA also notes that EFRAC has a high working capital intensity of
business because of a stretched receivable position that continues
to exert pressure on its cash flows. The rating also considers the
high coupon rate on non-convertible debentures (NCDs), which
results in a high interest outgo.
The rating, however, derives comfort from the established track
record of the Keventer Group, which supports EFRAC's market
position to an extent, and a reputed client base, which mitigates
the counterparty credit risk to a large extent. The rating
positively considers the receipt of accreditation/ certification
from most of the approving agencies in the food, drug and
environment division, which is likely to support the operations,
going ahead.
Key rating drivers and their description
Credit strengths
* Established track record of the Keventer Group: EFRAC is a part
of the Keventer Group, which comprises various entities involved in
diversified businesses like fast moving consumer goods (FMCG), real
estate, food products and agro-related businesses. The Group has
supported the business of the company in operational aspect as well
as by extending financial assistance through infusing equity/
unsecured loans, as and when required.
* Accreditation/certification in place from most of the approving
agencies: The company operates a testing and research laboratory
for food and food products, drugs and cosmetics, and environment.
It has received accreditation/ certification from most of the
approving agencies for all the divisions that the company caters
to, which is likely to support the operations, going ahead.
* Reputed customer profile reduces counterparty risk to an extent:
The company has established relationships with reputed clients and
has availed repeat orders from them. The reputed client base
reduces the counterparty risk to a large extent.
Credit challenges
* Weak financial profile characterised by significant cash losses,
an adverse capital structure and depressed coverage indicators:
The company posted cash losses of INR4.98 crore and INR3.05 crore
in FY2019 and H1 FY2020 (unaudited), respectively because of its
small scale of operations and low margin, coupled with high
interest and finance cost. The company's capital structure was
adverse as on March 31, 2019 and September 30, 2019 (unaudited) on
account of an erosion of net worth due to losses witnessed by the
company over the past few years. High debt levels and low profits
kept the debt coverage indicators depressed. ICRA notes that cash
accruals generated by EFRAC are still insufficient for meeting the
debt repayments, leading to dependence on external financing.
* Relatively small scale of operations: The company's scale of
operations continues to remain small. The operating income (OI)
stood at INR14.18 crore in FY2019, depicting a decline of around 4%
over FY2018. It registered an OI of INR8.11 crore in H1 FY2020
(unaudited), registering a Y-o-Y growth of ~ 32% over the
corresponding period of the previous fiscal.
* High working capital intensity of business exerts pressure on the
company's liquidity: The company's working capital intensity of
operations has remained high, as reflected by the net working
capital relative to operating income (NWC/OI) of 83% and 65% in
FY2019 and H1 FY2020 (unaudited), respectively, primarily on
account of stretched receivables. This in turn, has stretched the
company's liquidity position. Consequently, it resulted in
deferment of the interest payment on the non-convertible debentures
for the quarter ending December 2019 to March 2020. However, the
promoters of the company infused INR5 crore in March 2020, which
led to a payment of deferred interest along with the interest for
the quarter ending March 2020.
* High coupon rate on NCDs: The coupon rate on the NCDs is high at
18%, which results in high interest outgo. However, scheduled
principal repayment at the end of five years eases liquidity
pressure to some extent.
Liquidity position: Poor
EFRAC's fund flow from operations (FFO) continues to remain
negative primarily because of cash losses registered by the
company. Moreover, high receivables of the company increased the
working capital requirements. The same would continue to exert
pressure on the company's liquidity position, going forward. With
sizeable debt servicing obligations along with absence of adequate
cash flows from operations, the liquidity position of the company
is likely to remain poor in the near term at least.
Rating Sensitivities
* Positive triggers: ICRA may upgrade EFRAC's rating if the
company's liquidity position improves significantly on a sustained
basis.
* Negative triggers: Pressure on EFRAC's rating may arise if there
is any further deterioration in the liquidity position, which may
lead to a delay in the debt servicing obligations of the company.
Edward Food Research and Analysis Centre Limited (EFRAC), a part of
the Keventer Group, was established in August 1921 by Mr. Edward
Keventer as Edward Keventer Private Limited. In 1986, the company
was acquired by Mr. M. K. Jalan, Promoter and Chairman of the
Keventer Group. Subsequently, the company's name was changed to
Edward Keventer Life Science Limited before being further changed
to Edward Food Research and Analysis Centre Limited. Mandala Food
Co-Investments II Ltd. and Mandala Litmus SPV, based out of
Mauritius, made an equity investment in FY2017, post which, the
Mandala Group holds an equity stake of 51% in EFRAC. The company
operates a testing and research laboratory for food and food
products, drugs and cosmetics, and environment at Subhash Nagar in
North 24 Parganas district, West Bengal.
FUTURE CORPORATE: ICRA Lowers Rating on INR226.67cr Loan to C
-------------------------------------------------------------
ICRA has revised the ratings on certain bank facilities of Future
Corporate Resources Private Limited (FCRPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term 226.67 [ICRA]C; revised from
Loans [ICRA]BB+ (Stable)
Long-term, 50.00 [ICRA]C; revised from
Fund-based [ICRA]BB+ (Stable)
Facilities
Short-term, 130.00 [ICRA]A4; revised from
Non-fund [ICRA]A4+
Based
Facilities
Principal 437.11 PP-MLD[ICRA]C; revised from
Protected Market PPMLD[ICRA]BB+ (Stable)
Linked Debenture
Programme
(PP-MLD)
Material Event
On March 26, 2020, ICRA received a communication from the debenture
trustee regarding default by FCRPL on acceleration of repayment of
non-convertible debenture (NCD) of INR135 crore. Furthermore, its
wholly-owned subsidiary – Rural Fairprice Wholesale Limited
(RFWL) – has also defaulted on acceleration of repayments of NCDs
amounting to INR670 crore.
Rationale
The rating revision takes into account the default by FCRPL on the
accelerated repayment of INR135 crore NCD (not rated by ICRA)
triggered by the event of default caused due to a sharp decline in
the share price of Future Retail Limited (FRL) and inability of the
company to top up the security cover. Consequently, there has been
an invocation of the pledge of the equity shares of FRL.
Key rating drivers and their description
Credit strengths
* Investment holding company of Future Group with strategic
importance to Group: FCRPL is primarily an investment holding
company of the Future Group, facilitating the funding of Group
companies through various investments and lending of loans and
advances, as well as providing services to scale up/support the
retail businesses of the Group. Being a part of Future Group, the
company enjoys financial support in the form of sizeable loans and
advances from Group companies.
Credit challenges
* Weakened performance of operating businesses since FY2018: The
performance of the company's operating businesses has weakened
since FY2018, following the loss of business from the Group
companies due to concerted efforts at reducing intra-Group
transactions. This has impacted its media and fabric trading
segments. Furthermore, the company's mobile connection business,
T24, witnessed a significant decline in revenues to INR6.9 crore in
FY2019 from INR30.7 crore in FY2018 due to increased competitive
intensity post the launch of Reliance Jio. These resulted in an
operating loss of INR18.8 crore in FY2019. Coupled with high
interest expenses, this led to a cash loss of INR744.9 crore in
FY2019. Due to insufficient cash flows from its operations, FCRPL's
debt servicing is solely dependent on its ability to monetise its
investments and / or timely refinance its debt.
* Weak financial profile with high borrowing levels; leveraged
balance sheet to support investments / increase stakes in Group
ventures: The company's financial profile is weak, with high
borrowing levels mainly to support investments or increase stakes
in Group ventures, fund its losses and repay customer advances.
Despite a reduction in its total debt as on December 31, 2019
through monetisation of some of its investments, FCRPL's debt
levels are expected to remain high in the near to medium term.
* High overall Group debt level; increase in pledge levels in
various listed companies: Despite monetisation of investments
across various Group entities, the total Group debt has increased
as on December 31, 2019, as against March 31, 2019. ICRA notes the
increase in debt is mainly on account of an increase in debt of the
opcos, with the total debt at the Group's listcos increased to
INR12,778 crore as on September 30, 2019 from INR10,951 crore as on
March 31, 2019. With continued reduction in the share price of the
Future Group listcos, the total Group debt/market capitalisation
has increased to 1.2 times as on March 16, 2020 from 0.4 times as
on March 31, 2019. Furthermore, this has resulted in an increase in
the pledged shareholding of the promoter Group, resulting in
reduced financial flexibility. However, the Group also has
investments in several unlisted entities, which provides an
opportunity to monetise investments.
Liquidity position: Poor
The company's liquidity profile is poor on account of its weak
operating performance. It has sizeable debt repayment obligations
of ~INR316.0 crore and ~INR729.0 crore in FY2021 and FY2022,
respectively. Being the key investment vehicle for the Group,
FCRPL's prospects are tied to the fortunes of the underlying
investee companies. In absence of sufficient cash flows from
operations, its ability to timely monetise its investments and / or
timely refinance its debt is critical for meeting its debt
repayment obligations. ICRA takes comfort from the financial
support enjoyed by the company in the form of loans and advances
received from the Group companies.
Rating sensitivities
After selling partial stakes in the general and life insurance
businesses, Future Lifestyle Fashions Limited (FLFL) and entire
stake in Skechers in FY2019, the Future Group witnessed investments
from Blackstone (total investment of INR1,750 crore– INR545 crore
towards secondary purchase of 6% stake in FLFL and INR1,200 crore
as zero coupon NCD in holdco of FLFL), Nippon Express (invested US$
50 million as primary equity and US$ 50 million as secondary
purchase in Future Supply Chain Solutions Limited), AION (invested
INR300 crore in FLFL) and Amazon (invested US$ 200 million for 49%
stake in Future Coupons Private Limited) during the current year.
FCRPL's management has indicated further monetisation of
investments in the near term to reduce the Group's overall debt.
Total debt as on December 31, 2019 (excluding impact of Ind-As) for
the holdcos and total debt as on September 30, 2019 for the
listcos.
* Positive triggers: The rating may be revised if there is a
material reduction in the Group debt both at the holdco as well as
the opco level, along with reduction in the pledge levels across
various listcos of the Future Group.
* Negative triggers: Inability of the Group to reduce its debt
levels (both at holcos as well as opcos) either through improved
internal cash flows and/or monetisation of investments would be a
negative trigger. Continued high pledge levels across various
listcos of the Group would also be negative.
Group Company: Future Group
ICRA expects the Future Group to be willing to extend financial
support to FCRPL, should there be a need, given the high strategic
importance of FCRPL being a key investment holding company for the
Group, and also out of its need to protect its reputation from the
consequences of a Group entity's distress. The Group has
consistently extended timely financial support to FCRPL in the
past, whenever a need has arisen.
Future Corporate Resources Private Limited (erstwhile Suhani
Trading and Investment Consultants Private Limited (STIC)), a
Future Group company, came into existence in its current form with
effect from March 31, 2017, after its amalgamation with the six
companies—Future Corporate Resources Limited (FCRL), PIL
Industries Limited, Weavette Business Ventures Limited, Manz Retail
Private Limited, ESES Commercials Private Limited, and Gargi
Business Ventures Private Limited. The company's name was changed
to FCRPL with effect from December 11, 2018. It is primarily an
investment company/holding company of the Future Group,
facilitating the funding of Group companies through various
investments and lending of loans and advances, and providing
services to scale up/support the retail business of the Group. The
company, moreover, acts as a media services and fabric trading arm
of the Future Group. FCRPL is involved in other allied businesses,
which were earlier under FCRL, including mobile connection services
in a tie-up with Tata DoCoMo under the brand, T24, the customer
loyalty programme, Payback, the leasing of information technology
assets (software as well as hardware) and management consultancy
services.
FUTURE RETAIL: S&P Cuts Prelim. LT ICR to 'CCC-', On Watch Negative
-------------------------------------------------------------------
On April 22, 2020, S&P Global Ratings lowered its preliminary
long-term issuer credit rating on Future Retail and the preliminary
long-term issue rating on the company's US$500 million senior
secured notes to 'CCC-' from 'B-'. The ratings remain on
CreditWatch with negative implications.
S&P said, "We lowered the ratings on Future Retail because we
believe that the company's liquidity position has weakened,
exacerbated by the extended lockdown in India due to COVID-19. The
India-based retailer's ability to meet its upcoming financial
obligations is dependent on an improvement in business conditions
or access to additional lines of credit. The company's first coupon
payment of Indian rupee (INR) 1 billion on its US$500 million
senior secured notes is due on July 22, 2020.
"Future Retail's operating cash flows are likely to remain weak
over the next two months. We anticipate a phased relaxation of the
lockdown across India after the government's deadline of May 3.
This could mean a gradual recovery in revenue. However, we believe
discretionary spending will remain low, given the expected decline
in disposable income due to the economic impact of COVID-19. Sales
in high-margin segments such as fashion (accounting for about
one-third of the company's revenue) are unlikely to pick up until
later in the year. We believe Future Retail's available cash and
cash equivalents have fallen from INR2 billion as of Dec. 31,
2019.
"Future Retail's disbursement of approved credit lines from banks
has been further delayed. This includes enhanced working capital
credit lines of about INR21.25 billion which were expected to be
available in April 2020. In addition, the company is proposing to
avail its INR6.5 billion peak-season working capital credit line to
support its liquidity. We understand that the delays in
disbursement are due to procedural issues during the lockdown and
the company now expects them to be available by May 2020. We expect
these credit lines to be sufficient to meet the company's immediate
funding requirements, should they become available. Timeliness
remains critical.
"Potential debt restructuring at the operating and promoter group
level remains an overarching credit risk, in our view. We note the
media reports on the company's plan to restructure onshore debt of
operating companies, including the appointment of a restructuring
advisor. The restructuring of onshore debt at Future Retail or
other related entities could trigger a cross-default on the
company's US$500 million senior secured notes. Additionally, the
restructuring of promoter debt could trigger the change-of-control
clause on the company's senior secured notes, through the promoter
shareholding potentially falling below 26% in such a scenario.
"Our ratings on Future Retail remain preliminary because the
cross-guarantees between Future Retail and group company Future
Enterprises Ltd. have not been fully released.
"We are keeping our ratings on Future Retail on CreditWatch
negative to reflect the company's weakening debt-servicing ability
and the likelihood that Future Retail or its related entities will
restructure its debt within the next few months."
Future Retail is India's leading retailer. It is listed on Indian
stock exchanges and is about 40%-owned by promoter shareholders as
of March 31, 2020. The company sells primarily food, grocery, home
and personal care products, and general merchandise via Big Bazaar
and Easyday/Heritage Fresh convenience stores, and fashion goods
via its Fashion at Big Bazaar format.
GREENKO ENERGY: S&P Affirms 'B+' ICR, Outlook Stable
----------------------------------------------------
S&P Global Ratings, on April 22, 2020, affirmed its 'B+' long-term
issuer credit rating on Greenko Energy Holdings and its 'B+'
long-term issue rating on the senior secured notes the company
guarantees.
S&P said, "We affirmed the rating on Greenko because we expect the
company's stabilizing operating performance on a larger and more
diversified portfolio to support its cash flows over the next 12
months. Although Greenko is likely to modestly deleverage, this
will depend on continued stabilization of its operational
performance. Moreover, we expect Greenko to continue to receive
sufficient funding and capital support from sponsor Government of
Singapore Investment Corp. (GIC) to pursue its growth plans."
Greenko's leverage will remain high over the next two to three
years. S&P projects the company's ratio of funds from operations
(FFO) to debt to be 4%-4.5% through to fiscal 2022 (year ending
March 2022). That is provided Greenko's overall portfolio performs
in line with P90 estimates (meeting expected power generation
levels at least 90% of the time). High capital expenditure (capex)
and working capital will result in low FFO cash interest coverage
of about 1.5x.
Weak operating performance over the past few years has delayed
Greenko's deleveraging at a time of sharp increase in portfolio
expansion. S&P believes that Greenko's now larger and more
diversified portfolio of close to 4 gigawatts (GW) will support
more stable performance at least in line with P90 generation
estimates over fiscals 2021-2022. The company's portfolio performed
in line with P90 estimates in fiscal 2020.
Greenko is exposed to the weak credit quality of Indian state
counterparties, which account for 60% of its total revenues.
India's Ministry of Power has confirmed that payment moratoriums
related to COVID-19 will not apply to renewable company state
offtakers and their priority dispatch status will remain intact.
S&P said, "However, we believe that a significant economic slowdown
due to strict virus containment measures could heighten risks of
payment delays from state distribution companies, which already
have weak credit quality. As such, we anticipate Greenko's annual
working capital investment for fiscals 2020 and 2021 to be US$100
million-US$150 million to account for these collection delays. We
expect timely payments from NTPC Ltd. and Solar Energy Corp. of
India Ltd., which account for 20% of Greenko's revenues, to support
its receivables profile."
S&P said, "We expect GIC to continue to support Greenko's funding
needs for growth and unexpected capex, but not necessarily to
actively deleverage. GIC is also likely to maintain its strong
track record of providing equity support as Greenko pursues
growth--organic or through acquisitions. Greenko's planned
acquisition of a 40% stake in Teesta Urja Ltd.'s operational hydro
project in Sikkim, an Indian state, will be supported by 30% equity
support from GIC and Abu Dhabi Investment Authority (ADIA). Greenko
announced this transaction in January 2020. However, given that
state approvals for the acquisition are pending, we expect that
this transaction is unlikely to take place until at least fiscal
2022.
"The stable outlook reflects our expectation that Greenko will
maintain P90 operating performance and prevent further increase in
leverage over the next 12 months. We also expect GIC to provide
funding support for the company's growth capex and any significant
working capital needs. Based on this, we estimate Greenko's FFO
cash interest coverage to be about 1.5x, assuming P90 asset
efficiencies."
S&P may lower the rating if Greenko's FFO cash interest coverage
sustainably falls below 1.5x. This could happen if:
-- Greenko's operating performance is weaker than P90;
-- The company's receivables position considerably worsens; or
-- It undertakes higher-than-expected debt-funded capex or
acquisitions without appropriate equity support.
S&P may raise the rating if Greenko's business profile improves
with greater operating stability and its leverage reduces, such
that the FFO-to-debt ratio is sustainably above 8%. Although this
is a remote scenario, it could happen if:
-- Greenko's board (led by GIC) adjusts the company's capital
structure or capex to sustainably deleverage; or
-- Greenko's operating performance and cash flows show higher
stability, driven by better-than-P90 asset efficiencies and
improved receivables position.
Greenko operates renewable energy projects across wind, solar, and
hydro throughout India. On March 31, 2020, Greenko's total
installed capacity was about 4GW. Unlike other renewable peers,
Greenko's growth thus far has been through acquisitions of
operational assets, allowing the company to achieve scale and
diversity quickly without operational risks.
Greenko is majority owned by sovereign wealth funds. GIC has
majority ownership with a 60% stake, ADIA owns 15%, and the
promoters of the company own the rest.
HERO FINCORP: S&P Lowers ICRs to 'BB+/B' on Lower Group Support
---------------------------------------------------------------
S&P Global Ratings lowered its long-term and short-term issuer
credit ratings on Hero FinCorp Ltd. to 'BB+/B' from 'BBB-/A-3'. The
outlook on the long-term rating is stable. Hero FinCorp is an
India-based nonbanking finance company.
S&P said, "We downgraded Hero FinCorp because we believe the
financially stronger parent Hero MotoCorp's ability to support the
rating on Hero FinCorp has diminished, although its willingness
remains unchanged. Hero MotoCorp's automotive sales and revenues
have declined because of negative macroeconomic factors over the
past 12 months. We expect the decline and the tough operating
conditions to continue over the next few quarters given the impact
of the COVID-19 outbreak. We expect Hero FinCorp's business to
remain reliant on the brand, reputation, and customer base of the
wider Hero MotoCorp group.
"On a stand-alone basis, we expect Hero FinCorp to face increasing
risks from challenging operating conditions stemming from the
COVID-19 outbreak. If economic risks sufficiently increase across
India's banking and financial system, we may lower the starting
point for finance company ratings. This would weigh on Hero
FinCorp's stand-alone creditworthiness, although group support
would offset the deterioration.
"The stable outlook reflects our view that Hero FinCorp is likely
to remain strategically important and supported by the stronger
group. We note that Hero FinCorp is not immune to heightened
economic risks affecting India's financial system over the next
12-18 months, but the effects of a deterioration in these
conditions would be offset by group support."
S&P would lower the ratings on Hero FinCorp if economic risks
sufficiently increase across India's banking and financial system
such that:
-- S&P lowers the starting point for finance company ratings; and
-- Increasing risks lead to a sustained deterioration in Hero
FinCorp's risk-adjusted capitalization below 10% or its credit
costs increase substantially relative to peers'.
Although unlikely, S&P would also downgrade Hero FinCorp if its
linkages to the wider group diminish or if the group credit profile
weakens. The group credit profile could weaken if:
-- S&P sees risks around Hero MotoCorp's ability to manage
economic headwinds over the next 12 months; or
-- In a remote scenario, the group's financial policies turn
sharply and become very aggressive, resulting in a substantial
increase in debt on a sustained basis.
S&P said, "We would raise the ratings on Hero FinCorp if the wider
group's credit profile improves and the finance company's
stand-alone creditworthiness does not deteriorate. We see a reduced
chance that this could occur over the next 12 months, given that
operating conditions for the automotive and financial services
sectors are likely to be stressed."
HIRA POWER: ICRA Reaffirms 'B+' Rating on INR79cr LT Loan
---------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Hira
Power & Steel Limited (HPSL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term fund- 50.00 [ICRA]B+ (Stable); reaffirmed
based cash credit and removed from ‘issuer not
cooperating' category
Long-term fund- 79.00 [ICRA]B+ (Stable); reaffirmed
based Term Loan and removed from ‘issuer not
cooperating' category
Non-fund-based- 74.00 [ICRA]A4; reaffirmed and
Letter of Credit removed from ‘issuer not
cooperating' category
Non-fund-based– 6.00 [ICRA]A4; reaffirmed and
Forward Contract removed from ‘issuer not
cooperating' category
Rationale
The ratings continue to draw comfort from the experienced promoters
of HPSL with long track record in the ferro-alloy industry and its
demonstrated ability to consistently operate at healthy capacity
utilisation levels. ICRA also notes the benefits from the captive
power capacity. Although due to unavailability of coal linkages,
the cost of production has increased in recent years, it remains
lower than the state electricity board's prices. The ratings are,
however, constrained by the cyclical nature of the ferro-alloy
industry with complete dependence on the steel sector. Further, the
ratings factor in the susceptibility of HPSL's profitability to the
volatility in raw material prices, finished goods realisations and
foreign currency exchange rates, given the high imports of
manganese ore. The ratings are also constrained by HPSL's modest
debt coverage indicators (as reflected by estimated debt-service
coverage ratio or DSCR of less than 1.0 time and Total Debt/OPBDITA
of more than 4.0 times in FY2020E) owing to sizeable repayment
obligations, low profitability and working capital intensive nature
of operations. In this context, ICRA draws comfort from the
need-based infusion of funds by the promoters in the past, which
has helped the company meet its cash flow mismatches. The Stable
outlook on the company's long-term rating reflects ICRA's belief
that HPSL will continue to benefit from the experience of its
promoters in the ferro alloys industry. This is expected to support
HPSL's scale of operations and accruals. Besides, this also
reflects ICRA's expectation of incremental need-based infusion of
funds by the promoters, to support the cash flow mismatches that
may arise amid the current challenging operating environment and
sizeable repayment obligations in FY2021.
Key rating drivers and their description
Credit strengths
* Experienced promoters with extensive track record in the
ferro-alloy industry: HPSL is promoted by the Mr. O. P. Agrawal
faction of the Raipur-based Hira Group. The promoter family has
more than two decades of experience in the ferro-alloy industry.
HPSL's subsidiary, Hira Electro Smelters Limited (HESL), is also
present in the ferro-alloy industry.
* Track record of healthy capacity utilization: HPSL is involved
in manufacturing ferro-alloys such as ferro manganese and silico
manganese, with an aggregate installed capacity of 46,000 metric
tonne per annum (MTPA) across production facilities. Over the
years, the company has demonstrated its ability to consistently
operate at healthy capacity utilisation levels, as reflected in an
average utilisation of 94% in the past seven years and ~97% in
FY2019.
* Benefits arising from captive power plant: HPSL's operations are
supported by a 20-MW captive thermal power plant, which assures
regular supply of power to the energy intensive ferro-alloy unit.
It also gives cost advantage against competitors, which procure
power from the state electricity board. Although, due to
unavailability of coal linkages, the cost of production has
increased in recent years, it remains lower than the state
electricity board's prices.
Credit challenges
* Modest debt coverage indicators: While the company has a
comfortable capital structure (Total Debt / Tangible Net Worth of
0.7 time and TOL/ TNW of 1.7 times in FY2019) supported by a
healthy build-up of net worth over the years, its debt coverage
indicators remain weak. This is reflected in a DSCR of less than
1.0 time and Total Debt/OPBDITA of more than 4.0 times in FY2020E.
This is because of low profitability, working capital intensive
nature of operations and sizeable repayment obligations. ICRA notes
that funding shortfalls in the past have been supported by infusion
of unsecured loans by the promoters. Further, repayment obligations
are scheduled to decline from FY2022 onwards, which should ease
pressure on the cash flows.
* Cyclical nature of the ferro-alloy industry with complete
dependence on the steel sector: Ferro-alloys are primarily used
for manufacturing alloy steel, wherein they impart special
properties such as increased resistance to corrosion and improved
hardness and tensile strength. Thus, the demand and realisations
for ferro-alloys are dependent upon the steel industry, which is
cyclical in nature. Furthermore, the domestic ferro alloy industry
faces intense competition from the overseas players.
* Susceptibility of profitability to volatility in raw material
prices and product realizations: The price of manganese ore, which
is the main raw material for HPSL, is characterised by high
volatility. As HPSL does not have enough captive supply or
long-term contracts with the suppliers, it procures manganese ore
at market prices, which keeps its profitability exposed to
volatility in raw material prices. Further, the realisations of
ferro-alloys are linked to the demand from the steel industry and
competition from other key players in the international market. In
the past eight years, HPSL's operating margins have fluctuated in a
wide range of -4% to 13% with a nine-year average of 7.9%. As the
company is highly dependent upon manganese ore imports, it also
gets exposed to foreign currency fluctuation risks, though it has
been following a prudent hedging policy during the past few years.
Liquidity position: Stretched
HPSL's liquidity position remains stretched against the backdrop of
low profitability, which together with working capital intensive
nature of operations is expected to keep its cash flow from
operations stretched vis-à-vis its scheduled debt
repayment obligations. Besides, the company's working capital
limits remain fully utilized, and cash and bank balances modest
(free cash and bank balance of INR11.44 crore as on March 31,
2019). While improvement in gross operating cycle (receivable and
inventory turnover period) together with infusion of funds by the
promoters supported the company's cash flows during FY2019, the
company's ability to sustain the same will remain crucial
determinants of its liquidity profile. ICRA also notes that the
company's liquidity position has been constrained by sizeable
investments made in Group companies.
Rating sensitivities
* Positive triggers: The long-term rating could be upgraded if the
company achieves a higher than anticipated improvement in scale and
profitability, leading to an improvement in its return and debt
protection metrics. Further, an improvement in the company's
liquidity profile, with adequate cash flow from operations to meet
the debt repayments and no/ nominal incremental outflow to Group
companies, would be crucial for a rating upgrade. Specific metrics
that could trigger an upgrade include DSCR of more than 1.1 times
and interest cover of more than 1.6 times on a sustained basis.
* Negative triggers: The ratings could be downgraded in case of a
significant decline in HPSL's scale of operations or profitability,
which impacts its return and debt-coverage metrics and results in
lower cash flow generation, or if the company experiences a
significant stretch in working capital cycle, weakening its
liquidity profile and/or resulting in an increase in its leverage.
Incorporated in 1984, HPSL manufacturers ferro-alloys such as ferro
manganese and silico manganese. Its production facility is in Urla,
Raipur (Chhattisgarh) comprising five furnaces with an aggregate
installed production capacity of 46,000 MT per annum. HPSL's
operations are supported by a 20-MW captive thermal power plant.
The company is promoted by the Mr. O. P. Agrawal faction of the
Raipur-based Hira Group.
In FY2019, the company reported a net profit of INR0.8 crore on an
operating income (OI) of INR482.5 crore, compared to a net profit
of INR3.0 crore on an OI of INR440.0 crore in the previous year.
HS SANDHU BUILDERS: ICRA Assigns B+ Rating to INR6.25cr LT Loan
---------------------------------------------------------------
ICRA has assigned rating to the bank facilities of H S Sandhu
Builders Pvt. Ltd. (HSBPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term Fund-
based limits–
Cash Credit 6.25 [ICRA]B+(Stable); assigned
Short-term Non-
fund based–
Bank Guarantee 6.25 [ICRA]A4; assigned
Long-term/Short-
term–Unallocated 2.50 [ICRA] B+(Stable)/A4; assigned
Rationale
The assigned rating factors in HSBPL's small scale and fluctuating
revenues over the years on account of the tender-based nature of
the business, thereby leading to weak cash accruals as well. The
rating also takes note of the high client-concentration risk as the
firm executes contracts only for the Military Engineer Services.
The ratings are also constrained by the vulnerability of the
company's profitability to fluctuations in the input prices, with
limited scope to pass on the price escalations. The rating also
considers the highly fragmented and competitive nature of the
industry, which, coupled with the tender-based contract awarding
system, limits the profitability.
The rating, however, derives comfort from the company being
registered as a Super Specialty contractor with the Army and the
long experience of the promoter in the civil construction business.
The ratings also factor in the sufficient cushion available at
present in non-fund based limits, which the company can use to look
for further orders.
The Stable outlook on the [ICRA]B+ rating reflects ICRA's opinion
that HSBPL will continue to benefit from the extensive experience
of its promoters.
Key rating drivers and their description
Credit strengths
* Experienced promoters with established track record of operations
in industry: The founding promoter, Mr. H S Sandhu, has been
involved in the contractual maintenance and civil construction
business for more than 35 years and has a thorough knowledge of the
industry. The long track record in the industry has helped the firm
to establish strong relationships with its suppliers and
customers.
Credit challenges
* Small scale of operations and low revenue visibility: HSBPL's
small scale of operations restricts economies of scale. Further,
the company has not procured any new tender in the last few
fiscals. Although the company has submitted bids for three tenders
amounting to INR49 crore, however, currently with a weak order
book, the revenue visibility of the company is low.
* Client concentration risk: HSBPL has been executing civil
construction and maintenance work for the Military Engineering
Services since inception and remains exposed to client
concentration risk.
* Fragmented and highly competitive nature of industry leading to
fluctuating operating income: Small and medium-sized Army civil
construction projects lead to low entry barriers and allow many
players to enter this sector, thus intensifying competition. As
contracts are awarded to the L1 bidder through tender offers, the
OI of the company remains contingent on the tender allocation.
Liquidity position: Stretched
The company's liquidity remains stretched on account of limited
revenue visibility due to nil order book position coupled with
extended debtor days due to payments under arbitration. However,
comfort could be taken from no outstanding debt obligations,
significant unsecured loans extended by the promoters and low
average utilisation (40%) of working capital facilities in the last
12 months ending January 2020.
Rating sensitivities
* Positive trigger: ICRA could upgrade the rating if the firm
demonstrates substantial increase in the scale of operations while
maintaining healthy profitability margins leading to increased cash
accruals. Specific credit rating metrics that may lead to positive
rating action includes, but is not limited to an interest coverage
of above 2 times on sustained basis.
* Negative trigger: The ratings could be downgraded if the company
is unable to procure fresh tenders resulting in subdued operating
scale and profitability.
Incorporated in 1980 as National Builders with Mr. H S Sandhu as
its proprietor, the company was registered with the Military
Engineering Services. National Builders was later taken over by H S
Builders Pvt. Ltd. on August 10, 2001 with Mr. H.S. Sandhu as its
Managing Director. The company executes civil, electrical, public
health and engineering works and is involved in civil construction
work for the Indian Army. The company is registered as a Super
Specialty contractor with the Army.
KARNA INT'L: ICRA Hikes Rating on INR13.50cr Loan to B
------------------------------------------------------
ICRA has revised the ratings on certain bank facilities of Karna
International (KI), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term– 13.50 [ICRA]B (Stable); Upgraded from
Fund based [ICRA]D
Rationale
The rating upgrade takes into account KI's track record of timely
debt servicing in the last seven months. The rating continues to
derive comfort from KI's long track record of operations and the
extensive experience of the partners, resulting in high-value
repeat orders from some of its customers over the past many years.
The rating also takes into consideration the firm's comfortable
capital structure with gearing of 0.94 times as on March 31, 2019.
However, the rating is constrained by the firm's exposure to the
UK, from where it generates 90-95% of its business and earns
revenues in Pound sterling. As a result, its profitability remains
vulnerable to foreign currency fluctuation risk in the absence of a
strong hedging policy. ICRA also notes the firm's modest scale of
operations and the highly competitive and fragmented industry where
it operates, given the numerous players in both the organised and
the unorganised sectors. Moreover, the firm is exposed to raw
material price fluctuation risk in the absence of price variation
clauses in the agreements with its customers. The rating is,
further, constrained by the high client-concentration risk to which
KI is exposed. The rating also takes into consideration the high
utilisation of working capital limits, as export payments from
customers are prolonged against low payable days.
The Stable outlook on the [ICRA]B rating reflects ICRA's opinion
that the firm will continue to benefit from its long track record
in the fastener industry. Its experienced management, established
relationship with customers and comfortable capital structure are
other credit strengths.
Key rating drivers and their description
Credit strengths
* Experienced management with long track record in fasteners
industry: The promoters have been manufacturing bolts, nuts,
fasteners, washers and other related products for more than 25
years. The firm's long presence in the industry has helped it to
establish strong relationships with suppliers and customers.
All this coupled with the average appreciation of Pound sterling
against the Indian rupee has resulted in strong growth in OI of
~38% in FY2019 to INR71.26 crore from INR51.74 crore in FY2018.
Given that the firm is mainly an export-oriented unit with maximum
sales made to the UK, an appreciation in Pound sterling against
Indian rupee leads to strong order inflows from the existing
clients as well as new clients.
* Comfortable capital structure: The firm's capital structure
remained comfortable with gearing of 0.94 times (previous year:
1.05 times) as on March 31, 2019. The comfortable capital structure
was primarily supported by adequate tangible net worth of INR14.75
crore and less long-term debt as on March 31, 2019. The Group
operates mainly on working capital (WC) bank facilities. The
gearing improved in FY2019, chiefly led by adequate cash accruals,
decreased short-term loan and scheduled repayments on long-term
debt.
Credit challenges
* Vulnerability to foreign currency risk: As the firm is mainly an
export-oriented unit, its sales are exposed to forex risk. Further,
it does not hedge its foreign currency and hence, its profitability
remains exposed to foreign exchange rate-fluctuation risk in case
of adverse movements in foreign currency rates. However, it has not
recorded any major forex losses in the past five years on the
foreign exchange front.
* Modest scale of operations restricts competitive position: KI is
a medium-sized manufacturer of cold and hot forged bolts, nuts,
washers, fasteners, anchors, brackets and other related products.
The firm reported an OI of ~INR71.26 crore (audited) and ~INR45.15
crore (based on management discussion) in FY2019 and 9M FY2020,
respectively. Its existing scale of operations remains smaller than
big-sized players in the fasteners and related products
manufacturing industry. This constrains its ability to benefit from
economies of scale and weighs on its competitive position
vis-à-vis the large-sized entities. Further, a modest scale
exposes the risk of a business downturn and the firm's ability to
absorb a temporary disruption and leverage fixed costs.
* High working capital intensity: The firm's working capital cycle
remains high as the receivable days are high due to elongated
realisations from customers and prompt payments to suppliers. The
firm offers high credit period to its existing clientele to retain
the same, which leads to its high working capital intensity
position. The debtor days of KI, however, decreased in FY2019 as a
significant portion of payments were realised in late FY2019. The
working capital intensity (NWC/OI) stood at 24% in FY2019 against
35% in FY2018.
* Profitability remains exposed to price variation risk: KI
manufactures a wide range of mild steel and iron-based products,
making its profitability vulnerable to adverse fluctuations in the
key raw material prices. In the absence of any price-variation
clauses in its orders and low bargaining power of the firm, the
profitability margins remain weak.
* High client-concentration risk: KI has high client-concentration
risk as most of the revenues originates from a few customers. The
firm derived 93% and 94% of its overall OI from the top five
clients in FY2019 and 9M FY2020 (in FY2018: 92%), respectively.
However, these customers possess sound credit profile, which
mitigates counterparty credit risk to a large extent. The
client-concentration risk, although is high, is mitigated to some
extent by the firm's established relationship with these clients
and repeat high-value orders secure by it from them.
* Stiff competition from other exporters and domestic players puts
pressure on profitability: The companies in the UK and Europe have
been importing fasteners from various Asian countries. This has
resulted in stiff competition among fastener manufacturing
companies in both indigenous and international markets. This, in
turn, has led to increased usage of sales promotion activities,
various cost-cutting measures, and attractive credit terms to
attain competitive edge.
Liquidity position: Stretched
The Group's liquidity position is stretched. With thin
profitability and moderate scale of operations in FY2019, the
liquidity position of the firm remains tight. The liquidity
position is further constrained by prolonged export payments from
customers against prompt payments to suppliers. This is evident
from the high utilisation of working capital limits by the firm.
Further, the current scenario due to the novel coronavirus
(COVID-19) pandemic (which may lead to disruptions in payments from
the customers and further elongation of the receivables cycle)
could exert pressure on the liquidity position.
Rating sensitivities
* Positive triggers: ICRA could upgrade the above long-term rating
if the firm demonstrates a healthy and sustained improvement in its
scale and profitability, with improvement in the working capital
intensity. Specific credit metrics that could lead to an upgrade of
KI's rating include interest coverage greater than 2.40 times on a
sustained basis.
* Negative triggers: Significant decline in OI or operating
profitability could exert negative pressure on the firm's rating.
Any deterioration in the debt coverage metrics (TD/OPBDITA) above
5.00 times on a sustained basis could lead to rating downgrade.
Stretch in the working capital cycle or significant withdrawal of
capital could also exert negative pressure on the rating.
KI was established in 1992 as a partnership concern with Mr.
Karnajit Lamba and Ms. Monica Lamba as partners. The firm is a
Government of India-recognised export house and an ISO 9001:2008
certified unit. The firm manufactures cold and hot forged bolts,
nuts, washers, fasteners, anchors, brackets and other equipment,
which are used in hardware item manufacturing, architectural and
construction activities. Its manufacturing facility is in the
Ludhiana district of Punjab. The firm derives most of its revenues
from export sales, primarily in the UK.
KNOWLEDGE EDUCATION: Ind-Ra Keeps D Loan Rating in Non-Cooperating
------------------------------------------------------------------
India Ratings and Research (Ind-Ra) has maintained the Knowledge
Education Foundation's bank facilities' ratings in the
non-cooperating category. The issuer did not participate in the
rating exercise despite continuous requests and follow-ups by the
agency. Therefore, investors and other users are advised to take
appropriate caution while using the ratings. The ratings will
continue to appear as 'IND D (ISSUER NOT COOPERATING)' on the
agency's website.
The instrument-wise rating actions are:
-- INR38.63 mil. Term loan (long-term) due on February 2019
maintained in Non-Cooperating category with IND D (ISSUER NOT
COOPERATING) rating; and
-- INR15 mil. Working capital facility (long-term) maintained in
Non-Cooperating category with IND D (ISSUER NOT COOPERATING)
rating.
Note: ISSUER NOT COOPERATING: The ratings were last reviewed on
April 26, 2016. Ind-Ra is unable to provide an update, as the
agency does not have adequate information to review the ratings.
COMPANY PROFILE
Knowledge Education Foundation is a registered foundation that,
along with Delhi Public School Society, runs a Central Board of
Secondary Education-affiliated school under the name Delhi Public
School in Bikaner, Rajasthan.
LAVISH POLYFAB: ICRA Assigns 'B+' Rating to INR2.95cr Loan
----------------------------------------------------------
ICRA has assigned rating to the bank facilities of Lavish Polyfab
Private Limited (LPPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund-based
Term Loan 2.95 [ICRA]B+ (Stable); Assigned
Fund-based
Cash Credit 2.75 [ICRA]B+ (Stable); Assigned
Rationale
The assigned ratings take into account the company's average
financial risk profile, evident from the leveraged capital
structure, average coverage indicators and the high working capital
intensity. The rating also factors in the firm's small-scale
operations in a highly fragmented industry, characterised by the
presence of large number of small players; the limited product
differentiation, which leads to intense competition; and the
exposure of profitability to fluctuations in key raw material
prices, which are primarily crude oil derivatives. The ratings
further consider the recent outbreak of COVID-19 and the subsequent
nationwide lockdown which led to shutdown of the company's
operations.
The ratings, however, favourably factor in the scale up of
operations backed by healthy ramp up of sales volume.
The Stable outlook on the [ICRA]B+ rating reflects ICRA's opinion
that LPPL will continue to scale up its operations, supported by
increased market penetration and further addition to its existing
product.
Key rating drivers and their description
Credit strengths
* Healthy volume growth and scale up of operations: LPPL commenced
commercial operations of manufacturing PP woven fabric in July
2017. The company reported a revenue of INR4.72 crore in its
initial year of operations. In FY2019, its scale of operations grew
at healthy rate of ~63% to INR7.71 crore, on the back of healthy
volume growth. In 11MFY2020, the company reported a revenue of
INR7.36 crore; it expects a revenue of ~INR8-9 crore in FY2020.
* Credit challenges Small scale of operations with limited track
record of operations: LPPL's scale of operations remains small,
with an operating income (OI) of INR8.17 crore in FY2019 and
INR7.44 crore in 11MFY2020. Furthermore, as its commercial
operations commenced from July 2017, the operational track record
of LPPL remains limited.
* Average financial risk profile: The company's financial risk
profile remains average, marked by a leveraged capital structure,
with high gearing of 2.17 times and small net worth base of INR2.47
crore as on March 31, 2019. The coverage indicators were also
average in FY2019, with Total Debt/OPBDITA at 3.37 times and
NCA/Total Debt of ~20%.
* High working capital intensity: The company's working capital
intensity (NWC/OI) remained high at ~37% in FY2019 due to high
debtor days and inventory levels. The company provides an average
credit period of ~40-60 days to its end customers. Further, it
receives a credit period of ~60-90 days from its suppliers on the
purchase of filler (Calcium Carbonate) and masterbatches. The
company keeps raw material inventory (usually ~2 months) to ensure
continuous operation and fulfil orders within the stipulated time
as a predominant part of the sales are order backed. Hence,
inventory level remained high (~114 days) in FY2019.
* Intense competition: PP woven fabric industry has a fragmented
structure, with presence of numerous small-scale players, as the
industry needs low capital investment and has limited entry
barriers. This has led to intense competition among the players.
* Vulnerability of profitability to any adverse fluctuation in
prices of raw materials: Polypropylene (PP) granules is the major
raw material, followed by fillers and masterbatches. PP granules is
a derivative of crude oil, which is a volatile commodity. The
prices of PP granules mirror the crude oil prices to some extent
and hence the profitability of the company remains exposed to any
adverse fluctuations in crude oil prices.
Liquidity position: Stretched
LPPL's liquidity position is stretched, marked by impending debt
repayments and high average working capital limits utilisation
(~75% against sanctioned limits of INR2.00 crore from December 18
to October 2019). However, the liquidity profile derives some
comfort from the recent enhancement in cash credit limit to INR2.75
crore from INR2.00 crore and expected adequate cash accruals to
meet debt obligations.
Rating sensitivities
Positive triggers
* Significant scale up of operations coupled with increased
profitability
* Improvement in working capital cycle
Negative triggers
* Substantial decline in scale of operations or erosion in
operating margins
* Any large debt-funded capex or stretch in working capital cycle
Incorporated in February 2016, Lavish Polyfab Private Limited
(LPPL) is a private limited company promoted by Mr. Sneh Patel and
his relatives and friends. The company commenced the manufacturing
of polypropylene (PP) woven fabrics from July 2017. Its
manufacturing facility, located at Savli, Vadodara, Gujarat, is
equipped with 36 circular looms and has an installed capacity to
produce 18 lakh kgs per annum.
In FY2019, the company reported a net profit of INR0.41 crore on an
operating income of INR8.17 crore compared to a net loss of INR0.79
crore on an operating income of INR4.74 crore in the previous
year.
LEITWIND SHRIRAM: Ind-Ra Keeps D Issuer Rating in Non-Cooperating
-----------------------------------------------------------------
India Ratings and Research (Ind-Ra) has maintained Leitwind Shriram
Manufacturing Limited's Long-Term Issuer Rating in the
non-cooperating category. The issuer did not participate in the
rating exercise despite continuous requests and follow-ups by the
agency. Therefore, investors and other users are advised to take
appropriate caution while using the rating. The rating will
continue to appear as 'IND D (ISSUER NOT COOPERATING)' on the
agency's website.
The instrument-wise rating actions are:
-- INR2,465.9 bil. Term loans (long-term) due on March 31, 2024
maintained in non-cooperating category with IND D (ISSUER NOT
COOPERATING) rating;
-- INR1,900.0 bil. Fund-based working capital facilities (long-
and short-term) maintained in non-cooperating category with
IND D (ISSUER NOT COOPERATING) rating; and
-- INR1,620.1 bil. Non-fund-based working capital facilities
(long- and short-term) maintained in non-cooperating category
with IND D (ISSUER NOT COOPERATING) rating.
Note: ISSUER NOT COOPERATING: The ratings were last reviewed on
January 4, 2017. Ind-Ra is unable to provide an update, as the
agency does not have adequate information to review the ratings.
COMPANY PROFILE
Leitwind Shriram Manufacturing, a joint venture between
Chennai-based Shriram Industrial Holdings Limited and Italy-based
WindFin BV, manufactures wind turbine generators.
MALNADY TEA: Ind-Ra Migrates BB Issuer Rating to Non-Cooperating
----------------------------------------------------------------
India Ratings and Research (Ind-Ra) has migrated Malnady Tea Estate
Private Limited's Long-Term Issuer Rating of 'IND BB' to the
non-cooperating category and has simultaneously withdrawn it.
The instrument-wise rating actions are:
-- INR0.87 mil. Term loan * due on March 31, 2020 migrated to the
non-cooperating category and withdrawn;
-- INR15 mil. Fund based limit* migrated to the non-cooperating
category and withdrawn;
-- INR25 mil. Proposed-fund based limit** migrated to the non-
cooperating category and withdrawn; and
-- INR30 mil. Non-fund-based limit*** migrated to the non-
cooperating category and withdrawn.
* Migrated to 'IND BB (ISSUER NOT COOPERATING)' before being
withdrawn.
** Migrated to Provisional 'IND BB (ISSUER NOT COOPERATING)'
before being withdrawn.
***Migrated to 'IND A4+ (ISSUER NOT COOPERATING)' before being
withdrawn.
KEY RATING DRIVERS
METPL did not participate in the rating exercise despite continuous
requests and follow-ups by Ind-Ra.
Ind-Ra is no longer required to maintain the ratings, as it has
received a no-objection certificate from the lender. This is
consistent with the Securities and Exchange Board of India's
circular dated March 31, 2017, for credit rating agencies.
COMPANY PROFILE
MTEPL was incorporated in 1973 under the flagship of Ashok Garg.
MTEPL has its registered office in Kolkata and a tea garden in
Malbazar, Jalpaiguri. The total area under its cultivation is
around 98 hectares. MTEPL manufactures green tea and trades veneer.
NOVELTY ASSOCIATES: Ind-Ra Moves 'BB' Rating to Non-Cooperating
---------------------------------------------------------------
India Ratings and Research (Ind-Ra) has migrated Novelty Associates
Private Limited's Long-Term Issuer Rating to the non-cooperating
category. The issuer did not participate in the rating exercise
despite continuous requests and follow-ups by the agency.
Therefore, investors and other users are advised to take
appropriate caution while using the rating. The rating will now
appear as 'IND BB (ISSUER NOT COOPERATING)' on the agency's
website.
The instrument-wise rating actions are:
-- INR108.85 mil. Term loans due on August 2023 migrated to non-
cooperating category with IND BB (ISSUER NOT COOPERATING)
rating;
-- INR960 mil. Fund-based working capital limits migrated to non-
cooperating category with IND BB (ISSUER NOT COOPERATING) /
IND A4+ (ISSUER NOT COOPERATING) rating; and
-- INR113.50 mil. Fund-based working capital limits migrated to
non-cooperating category with IND BB (ISSUER NOT COOPERATING)
/ IND A4+ (ISSUER NOT COOPERATING) rating.
Note: ISSUER NOT COOPERATING: The ratings were last reviewed on
March 14, 2019. Ind-Ra is unable to provide an update, as the
agency does not have adequate information to review the ratings.
COMPANY PROFILE
Novelty Associates is a part of the Novelty group formed by S
Kartar Singh in 1950. The group owns Novelty Sweets in Amritsar and
has interests in the food, automobile, and real estate businesses.
P.N. WRITER: Ind-Ra Puts 'BB+' Issuer Rating on Watch Negative
--------------------------------------------------------------
India Ratings and Research (Ind-Ra) has placed P.N. Writer &
Company Pvt Ltd's (PNW) Long-Term Issuer Rating of 'IND BB+' on
Rating Watch Negative (RWN). The outlook was Negative.
The instrument-wise rating action is:
-- INR348 mil. (reduced from INR720 mil.) Term loan due on May
2026 placed on RWN with an IND BB+/RWN rating.
Analytical Approach: Ind-Ra continues to take a consolidated view
of PNW and Writer Lifestyle Private Limited (WLPL; 'IND BB+'/RWN)
in view of the strong legal, operational and strategic linkages
between the entities.
KEY RATING DRIVERS
On a standalone basis, PNW holds real estate assets such as
commercial properties and residential apartments. The company
derives rental income from these properties, which is likely to
remain stable despite the ongoing COVID-19 crisis.
The RWN reflects the government-imposed travel ban and complete
lockdown to combat the outbreak of COVID-19, which is likely to
impact WLPL's operating performance in FY21. This would adversely
affect PNW, as it derives a significant portion of its revenue from
the hospitality segment under WLPL. The RWN also factors in the
continued uncertainty regarding any pick-up in demand even after
the threat of COVID-19 subsides, which could delay recovery in the
sector.
The ratings reflect the small scale of operations, with
consolidated revenue of INR463 million in FY19. As of 9MFY20, the
consolidated revenue amounted to INR360 million. While the revenue
had stood at INR1,188 million in FY18, the company had divested its
entire stake of 100% in its Dubai-based subsidiary in March 2018
(P.N. Writer and Company Limited) as a part of the business
restructuring carried out at the group level. Hence, the revenue
and EBITDA figures for FY19 and FY18 are not wholly comparable.
On a consolidated basis, PNW reported an EBITDA profit of INR15
million in 9MFY20, as against EBITDA losses of INR24 million in
FY19 (FY18: INR56 million), due to improved control over costs.
Consequently, the interest coverage improved to 0.1x in 9MFY20. The
operational performance also improved as occupancy levels at the
Hilton Shillim Retreat and Spa in Lonavala rose to 54% in 9MFY20
from 52% in FY19 (FY18: 49%). While the agency believes the EBITDA
is likely to have been positive in FY20, the impact of COVID-19 on
the operations at the Hilton Shillim estate could impact
profitability in FY21.
On a standalone basis, PNW's revenue fell slightly to INR67 million
in FY19 (FY18: INR71 million) owing to a marginal drop in the
rental income received from its properties. PNW's standalone EBITDA
improved to INR46 million for FY19 (FY18: INR37 million) on account
of a fall in general and administration expenses. The standalone
EBITDA improved further to INR41 million in 9MFY20, led by a slight
reduction in operating expenses. PNW receives interest income
(FY19: INR37 million; FY18: INR51 million) on loans and advances
extended to its associates and group companies. In February 2020,
PNW sold two apartments in Bandra, Mumbai, for a total
consideration of INR 217.5 million. Part of the proceeds has been
used to repay debt.
At FYE19, PNW had a consolidated debt of INR2,905 million (FYE18:
INR2,746 million); of this, about INR1,249 million had been
extended by either the promoters or group companies. The management
has informed the agency that either the promoters or other group
companies will extend tangible support to PNW, in case the company
makes losses. Moreover, the management is planning to sell owned
residential properties in Bandra, warehouses in Maharashtra, and
villas being developed in a land bank in Lonavala (around 84 acres)
in the near term to reduce debt.
Liquidity Indicator - Poor: The consolidated cash flow from
operations remained negative at INR152 million in FY19 (FY18:
negative INR429 million) owing to continued operating losses and
high-interest expenses. Consolidated cash and bank balances
amounted to INR22 million at end-FY19 (FY18: INR95 million) against
a scheduled consolidated debt repayment of INR220 million in FY20.
The ratings benefit from the likely support in the form of loans
and advances from either the promoters or other group companies to
PNW, in case of financial losses. In FY19, PNW received incremental
loans of INR455.5 million from the promoters and other group
companies.
RATING SENSITIVITIES
The RWN indicates that the rating may be affirmed or downgraded.
The RWN will be resolved once the agency receives greater clarity
on the lifting of the COVID-19-related shutdown and the impact of
the same on Ind-Ra's base case estimates.
COMPANY PROFILE
PNW is a part of the Mumbai-based Writer Corporation group, which
is engaged in diversified businesses such as relocation services,
information and records management services, cash management
services, and hospitality.
As a standalone entity, PNW derives revenue through rental income
from a residential property in Bandra West, Mumbai (St. Leo
Apartments; a seven-story building with an area of 857 square
meters) and some commercial properties leased to Writer Business
Services.
WLPL, a wholly-owned subsidiary of PNW, engaged in the hospitality
business. It has a luxury resort, Hilton Shillim Estate Retreat,
and Spa, in Lonavala, near Mumbai. It is also involved in the real
estate business and has been constructing villas in Shillim,
Lonavala, for sale.
PAN INDIA: ICRA Keeps 'D' Rating in Not Cooperating Category
------------------------------------------------------------
ICRA said the rating for INR1,200.0-crore bank facilities of Pan
India Infraprojects Private Limited (PIIPL) continues to remain
under 'Issuer Not Cooperating' category. The rating is denoted as
"[ICRA]D / [ICRA]D ISSUER NOT COOPERATING".
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term 641.00 [ICRA]D ISSUER NOT COOPERATING;
Loans Continues to remain under
'Issuer Not Cooperating' category
Long-term, 559.00 [ICRA]D ISSUER NOT COOPERATING;
Unallocated Continues to remain under
Limits 'Issuer Not Cooperating' category
ICRA had earlier moved the rating of PIIPL to the 'ISSUER NOT
COOPERATING' category due to non-submission of monthly 'No Default
Statement' ("NDS") by the entity.
ICRA has been trying to seek information from the entity so as to
monitor its performance, but despite repeated requests by ICRA, the
entity's management has remained non-cooperative. The current
rating action has been taken by ICRA basis best available limited
information on the issuers' performance. Accordingly, the lenders,
investors and other market participants are advised to exercise
appropriate caution while using this rating as the rating may not
adequately reflect the credit risk profile of the entity.
PIIPL is part of the Essel Group and functions as the nodal EPC
agency for various projects undertaken by the Group. PIIPL is
involved in sectors like road, power transmission, solar, waste
management, water distribution, etc. EIL, the Essel Group's holding
company in the infrastructure segment, bids and executes projects
through projectspecific SPVs. These SPVs award the project
management / execution contracts to PIIPL, who in turn
sub-contracts projects to various contractors.
PATNA HIGHWAY: Insolvency Resolution Process Case Summary
---------------------------------------------------------
Debtor: Patna Highway Projects Limited
Second Floor, Plot No. 360
Block-B, Sector-19
Dwarka, New Delhi 110075
Insolvency Commencement Date: January 7, 2020
Court: National Company Law Tribunal, New Delhi Bench
Estimated date of closure of
insolvency resolution process: July 5, 2020
Insolvency professional: Mr. Sutanu Sinha
Interim Resolution
Professional: Mr. Sutanu Sinha
BDO Restructuring Advisory LLP
Floor 4, Duckback House 41
Shakespeare Sarani
Kolkata 700017
West Bengal
E-mail: sutanusinha@bdo.in
- and -
BDO Restructuring Advisory LLP
Windsor IT Park
Plot No. A-1. Floor-2
Tower-B, Sector-125
Noida 201301
E-mail: irpphpl@bdo.in
Last date for
submission of claims: January 21, 2020
PERFECTO ELECTRICALS: ICRA Reaffirms 'C' Rating on INR7.50cr Loan
-----------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Perfecto
Electricals (PE), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund based–
Cash Credit 7.50 [ICRA]C; Reaffirmed
Non-fund based–
Bank Guarantee 20.00 [ICRA]A4; Reaffirmed
Unallocated
Limits 8.00 [ICRA]C/[ICRA]A4; Reaffirmed
Rationale
The reaffirmation of the ratings considers PE's relatively small
scale of current operations and a weak financial profile,
characterised by an aggressive capital structure and subdued
coverage indictors. The ratings also take into account the high
working capital intensity of the business on the back of high
receivables, leading to a highly stretched liquidity position of
the firm. ICRA notes that the Indian Railways accounts for the
entire revenue of the firm and the current outstanding order book
is primarily concentrated in eastern India, which leads to high
customer as well as geographical concentration risks. Besides,
there is execution risk arising from delays in availability of
land. The ratings further incorporate the risk associated with the
entity's status as a partnership firm, including the risk of
capital withdrawal by the partners.
The ratings, however, derive comfort from the promoters' extensive
experience in the supply and installation of signalling and
telecommunication systems and a reputed client base, which
mitigates the counterparty credit risk to a large extent.
Key rating drivers and their description
Credit strengths
* Long experience of promoters: PE was promoted by the
Kolkata-based Kothari family in 1964. The promoters have an
experience of more than five decades in the supply and installation
of signalling and telecommunication systems for the Indian
Railways. It has also been undertaking air-conditioning contracts
from the Kolkata Metro Railway since 1988.
* Reputed customer profile: The promoters of the firm have
established relationship with various divisions of the Indian
Railways and have availed repeat orders. The counterparty risk
reduces to a large extent due to a reputed client base.
Credit challenges
* Relatively small scale of current operations: The firm's scale
of operations continued to remain small, notwithstanding an
increase witnessed in the operating income to INR23.26 crore in
FY2019 from INR18.20 crore in FY2018, depicting a growth of ~28% on
the back of higher execution of contracts awarded.
* Weak financial profile characterised by an aggressive capital
structure and subdued coverage indicators: The capital structure
of the firm remained aggressive, as depicted by TOL/TNW of 7.70
times as on March 31, 2019 on account of high creditors' funding.
The profits and cash accruals of the firm continue to remain low on
account of small scale of operations. Consequently, the coverage
indicators continued to remain subdued, as indicated by an interest
coverage indicator of 1.31 times, Total Debt/OPBDITA of 3.98 times
and NCA/Total Debt of 2% in FY2019.
* High working capital intensity of business: The working capital
intensity of the firm improved to 33% in FY2019 from 77% in FY2018,
primarily due to an increase in the scale of operations and an
increase in creditors' funding. However, it continues to remain
high on the back of high receivables. This in turn, stretches the
concern's liquidity position, which restricts its financial
flexibility to a large extent.
* Exposure to execution risk: The firm remains exposed to the
execution risk arising from delays in availability of land, which
results in delay in execution of contracts.
* Risk associated with the entity's status as a partnership firm:
PE's legal status as a partnership firm gives rise to the risk of
capital withdrawal by the partners, which might impact the capital
structure and the liquidity position.
Liquidity position: Poor
High working capital requirements resulted in high utilisation of
its fund-based limits, as reflected by an average utilisation of
around 100% in the last 15 months. ICRA expects that the liquidity
position of the company is likely to remain poor on account of low
cash accruals from the business. Moreover, high receivables, along
with significant cash margin given against bank guarantees issued
to its customers as performance guarantee, and retention money
withheld by the clients as per terms of the contracts, would
continue to keep the working capital requirement at a high level.
As the firm's business is expected to record a modest growth in the
medium term, efficient management of working capital requirement
would remain crucial, going forward.
Rating Sensitivities
* Positive triggers: ICRA may upgrade PE's ratings if the firm
demonstrates a significant improvement in the scale of operations
along with cash accruals and the liquidity position on a sustained
basis.
* Negative triggers: Pressure on PE's ratings could arise if there
is any delay in timely servicing of debt obligations. Any further
weakening of the liquidity position and/ or any major debt-funded
capital expenditure, which could adversely impact the company's
liquidity position, may also result in ratings downgrade.
Established in 1964, Perfecto Electricals is promoted by the
Kolkata-based Kothari family. It is involved in execution of
signalling and telecommunication system for the Indian Railways and
air-conditioning facilities for the Kolkata Metro Railway. It is
also involved in planning, designing, testing, commissioning and
maintenance of projects.
PS TOLL: ICRA Lowers Rating on INR790cr Term Loan to B+
-------------------------------------------------------
ICRA has revised the ratings on certain bank facilities of PS Toll
Road Private Limited (PSTRL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Term Loans 790.0 [ICRA]B+ (Stable); downgraded
from [ICRA]BB+ (Negative)
Rationale
The downgrade in the rating reflects the lower-than-anticipated
traffic growth in 9MFY2020, on account of the Ministry of Road
Transport and Highways' (MORTH) directive to increase the load
carrying capacity of heavy vehicles by 20%-25% in July 2018; the
slowdown in the economic activity; and the incessant rains in the
region from July 2019-October 2019, wherein the stretch after
Satara was completely flooded. The deluge lead to a decline in
traffic, thereby moderating the debt coverage metrics. The rating
is also exposed to heightened regulatory risk as the company
deferred the premium payable to the NHAI to the extent of INR68.82
crore for the period January 2019-June 2019 as per independent
engineer approval; however, the NHAI had not approved the same.
ICRA is given to understand that the NHAI has asked the company to
make the payment, including an interest of 12% on the outstanding
amount. Further, the project execution has been delayed by more
than seven years; partially because of non-availability of land.
Till date, PSTRPL received the NHAI's approval for three extensions
of time line (EOT) till December 15, 2017, for project completion.
ICRA notes that the independent engineer has recommended four more
EOTs; however, the same are yet to be approved by the NHAI. Given
that the project is awarded under NHDP Phase-V, tolling during
construction is permitted. The delayed execution along with the
pending NHAI approval for deferment of COD exacerbates the risk of
the NHAI imposing restrictions on use of toll collections as
noticed in some of the other NHDP Phase-V projects. In such a case,
the debt servicing ability of the SPV gets severely constrained,
necessitating dependence on the sponsor. Also, part of the pending
project cost is estimated to be funded through equity support from
sponsor. Given the overall weakening of the sponsor group, the
likelihood of such a support from the sponsor is low. The rating is
further constrained by the residual execution risk; the company
achieved 97.18% physical progress till December 31, 2019. The
rating also remains constrained by the interest rate risk,
considering the floating nature of interest rates for the project
loan. Further, PSTRPL's ability to manage its routine and periodic
maintenance expenses within the budgeted levels remains crucial
from a credit perspective. The rating remains constrained by the
WPI-linked escalation in toll rates, which could limit the growth
in toll collections during periods of low WPI rate. Notwithstanding
the track record of toll collections, the project remains exposed
to risks inherent in BOT (Toll) road projects, including risks
arising from political acceptability of rate hikes linked to WPI
over the concession period and development/improvement of alternate
routes.
The rating, however, continues to favourably take into account the
importance of the project highway as part of the Golden
Quadrilateral connecting important cities, Pune and Satara. The
rating also factors in the long operational track record of more
than eight years, with traffic growing at a CAGR of 7.0% in
Passenger Car Unit (PCU) terms between FY2011 to FY2019. The
stretch witnessed 4.8% growth in traffic during FY2019 (in PCU
terms), primarily driven by increasing commercial activity in the
region. However, the traffic declined by 0.8% in 9MFY20 (in PCU
terms) on account of the Ministry of Road Transport and Highways'
(MORTH) directive to increase the load carrying capacity of heavy
vehicles by 20%-25% in July 2018; the slowdown in the economic
activity; and the incessant rains in the region from July
2019-October 2019, wherein the stretch after Satara was completely
flooded. Further, the rating factors in the flexibility by virtue
of the five-year long tail period and the presence of structural
features such as escrow and waterfall mechanism, which restricts
any cash flow leakages; however, any instances of support to
sponsor group will remain a key rating sensitivity.
ICRA takes note of the constrained vehicular movement in the run up
to the lockdown due to Covid-19, followed by suspension of tolling
for the 21-day period (i.e. from March 25, 2020 – April 14, 2020)
after the lockdown announcement by the Government of India. As per
the concession agreement, the 21 -day toll suspension will be
treated as force majeure (political) event and occurrence of the
epidemic event as force majeure (Non-political) event. Under force
majeure (political) event, all force majeure costs (include
interest payments on debt, O&M expenses, any increase in the cost
of construction works on account of inflation and all other costs
directly attributable to the force majeure event) will be
reimbursed by the NHAI for the affected period. However, the
quantum and timelines for release of compensation is uncertain as
on date.
Further, PS Toll Road Private Limited did not honor its scheduled
payment obligations falling due on March 31, 2020, pertaining to
the INR790 crore term loan facilities rated, as it is seeking a
moratorium on payments from its lenders as part of the COVID-19 -
Regulatory package announced by the Reserve Bank of India (RBI) on
March 27, 2020. However, despite the missed payment and the absence
of a formal approval from the lenders allowing for a payment
relief, ICRA has not recognized this instance as a Default as of
now. This is based on ICRA's expectation that a formal approval for
rescheduling the loan would be received soon, as permitted by the
RBI as part of the relief measures announced recently.
Non-recognition of default in this case is as per the guidance
provided by the SEBI circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/53
dated March 30, 2020. It may, however, be noted that if the lenders
do not approve of the moratorium in due course, ICRA would review
the above stance on default recognition.
Key rating drivers and their description
Credit strengths
* Long operational track record: The project stretch has a long
operational track record of more than eight years with traffic
growing at a CAGR of 7.0% in Passenger Car Unit (PCU) terms between
FY2011 to FY2019. The stretch witnessed 4.8% growth in traffic
during FY2019 (in PCU terms) primarily driven by increasing
commercial activity in the region. However, the traffic declined by
0.8% in 9MFY20 (in PCU terms) on account of the Ministry of Road
Transport and Highways'(MORTH) directive to increase the load
carrying capacity of heavy vehicles by 20%-25% in July 2018; the
slowdown in the economic activity; and the incessant rains in the
region from July 2019-October 2019, wherein the stretch after
Satara was completely flooded.
* Favourable location of project: The project is a part of NH-4
(Mumbai - Chennai highway and part of the Golden Quadrilateral),
which passes through the states of Maharashtra, Karnataka and Tamil
Nadu. NH-4 is 1,235 km in length and is a major National Highway in
Western and Southern India, linking four of the 10 most populous
Indian cities - Mumbai, Pune, Bangalore, and Chennai. The entire
transportation from western and southern Maharashtra takes place
along this highway. The project section carries heavy commercial
traffic destined towards Shirwal Special Economic Zone. The
passenger traffic is destined to Pune, Satara, Kolhapur and
Sangli.
* Presence of structural features and long tail period: The rating
factors in the flexibility arising from five-year long tail period,
presence of structural features such as escrow and waterfall
mechanism, which restricts any cash flow leakages, however, any
instances of support to sponsor group will remain a key rating
sensitivity.
Credit challenges
* Lower-than-expected traffic growth impacts coverage metrics: The
traffic growth of the company in 9MFY2020 is significantly lower
than anticipated, on account of the Ministry of Road Transport and
Highways'(MORTH) directive to increase the load carrying capacity
of heavy vehicles by 20%-25% in July 2018; the slowdown in the
economic activity; and the incessant rains in the region from July
2019-October 2019, wherein the stretch after Satara was completely
flooded.
* Heightened regulatory risk: PSTRPL had to pay a premium of
INR134.3 crore in FY2019 and INR105.8 crore in 9MFY2020 to the
NHAI. Premium is payable monthly within 7 days of the close of each
month. The company deferred the premium of INR68.82 crore for the
period January 2019 – June 2019 as per independent engineer
approval; however, the NHAI had not approved the same, thereby
heightening the regulatory risk. ICRA is given to understand that
the NHAI has asked the company to make the payment including an
interest of 12% on the outstanding amount.
* Continued delays in project execution and residual execution
risk: There have been continuous delays in project executions for
more than seven years. Till date, PSTRPL received NHAI's approval
for three extensions of time line (EOT) till December 15, 2017 for
project completion. ICRA notes that the independent engineer has
recommended four more EOTs, however, the same are yet to be
approved by the NHAI. The rating is further constrained by the
residual execution risk; the company achieved 97.18% physical
progress till December 31, 2019.
* Significant dependence on sponsor support to service debt
obligation in case of restriction by NHAI on usage of toll revenue:
The project is awarded under NHDP Phase-V, wherein tolling during
construction is permitted. The delayed execution along with pending
NHAI approval for deferment of COD exacerbates the risk of the NHAI
imposing restrictions on use of toll collections as noticed in some
of the other NHDP Phase-V projects. In such a case, the debt
servicing ability of the SPV gets severely constrained,
necessitating dependence on the sponsor. Also, part of the pending
project cost is estimated to be funded by equity from sponsor.
Given the overall weakening of the sponsor group, the likelihood of
such a support from the sponsor is low.
* Constrained vehicular movement in the run up to the Covid-19
lockdown followed by suspension of tolling for the 21-day period
will impact toll collection: Constrained vehicular movement in the
run up to the lockdown due to Covid-19 followed by suspension of
tolling for the 21-day period (i.e. from March 25, 2020 - April 14,
2020) following the lockdown announcement by Government of India
will impact the toll collections. Though NHAI will reimburse the
costs including interest payments on debt, O&M expenses, and any
increase in the cost of construction works on account of inflation;
however, quantum and timelines for release of compensation is
uncertain as on date. Project cash flows sensitive to traffic
growth rates and acceptability of toll rate hike - PSTRPL's cash
flows are exposed to volatility in toll collections due to future
traffic growth rate and movement in WPI (for toll rate hike). Any
moderation in traffic growth or WPI from anticipated levels may
lead to weakened project metrics. The project also remains exposed
to risks inherent in BOT (Toll) road projects, including risks
arising from political acceptability of rate hikes linked to WPI
over the concession period.
* Project remains exposed to interest rate risk: PSTRPL cash flows
are exposed to interest rate risk, considering the floating nature
of interest rates for the project loan.
Liquidity position: Stretched
The liquidity position of PSTRPL remains stretched with
unencumbered cash balance of INR7.9 crore as on March 31, 2019. The
company has to create a Debt Servicing Reserve Account (DSRA)
equivalent to one quarter of debt servicing obligations; the same
will be created out of undisbursed loan amount of INR32 crore as on
December 31, 2019. The company has to incur a pending project cost
of INR62 crore (excluding DSRA) as on December 31, 2019 which will
be funded through INR9 crore of term loan and balance through
internal accruals/ promoter's contribution. The repayment
obligation stands at INR16.4 crore in FY2021 and INR24.2 crore in
FY2022 respectively.
Rating sensitivities
* Positive triggers: The crystallisation of scenarios for rating
upgrade is unlikely over the medium term. However, if there is an
improvement in the sponsor's credit profile or the company
identifies alternate sources to fund the cash gap, the ratings
might be upgraded.
* Negative triggers: Downward pressure on the ratings might emerge
if lenders do not approve of the moratorium in due course or if
there is further delay in achieving COD, resulting in cost overrun
or if traffic growth is lower-than-anticipated, or the company
incurs higher-than-anticipated O&M expense (routine and major
maintenance expense), or the company contracts any further debt
and/or non-adherence to cashflow waterfall mechanism resulting in
cash flow leakages, thereby weakening the liquidity profile of
PSTRPL.
Incorporated in February 2010, PS Toll Road Private Limited
(PSTRL), is a special purpose vehicle (SPV) promoted by Reliance
Infrastructure Limited (R Infra) and Jiangsu Provincial
Transportation Engineering Group Co. Ltd. (JTEG) for widening of
Pune - Satara stretch from existing 4 lanes to 6 lanes on
Built-Operate-Transfer (BOT Toll) basis in the state of
Maharashtra. The Project is a part of NH 4 and starts at Km 725.00
and ends at km 865.35 of NH 4, with a total length of about 140.35
km. The project was awarded by the National Highways Authority of
India (NHAI) based on the highest premium quoted of INR90.90 crore
in the first year (escalates at 5% p.a. thereafter). The concession
period is for 24 years from the appointed date (i.e., October 1,
2010). The project is expected to achieve COD in May 2020.
RELIGARE FINVEST: ICRA Reaffirms 'D' Rating on INR9220cr Loans
--------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Religare
Finvest Limited (RFL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Long-term
Bonds/NCD/LTD 220 [ICRA]D reaffirmed
Long term/
Short term
Fund based
Bank Limits 9,000 [ICRA]D/D reaffirmed
Rationale
The ratings take into account the ongoing delays in servicing of
its debt obligations by RFL. In April 2019, RFL did not repay its
bank loans due to the non-agreement with the lenders on the
proposed resolution plan. The company is currently in talks with
lenders to implement a revised proposed resolution plan. In June
2019, Religare Enterprises Limited (REL, the holding company of
Religare Finvest Limted (RFL)) had announced that it had entered
into a binding term sheet with TCG Advisory Services Private
Limited, Religare Finvest Limited (RFL) and Religare Housing
Development Finance Corporation Limited (RHDFC) whereby REL was to
divest its entire stake in RFL, to TCG Advisory Services Private
Limited or any of its affiliates (Acquirer). However, RBI has
rejected the proposal by TCG Advisory to acquire RFL and its
subsidiary, RHDFC and has asked RFL to submit a revised plan for
its revival. In light of the current capital constraints being
faced by RFL, it is imperative for the company to raise fresh
capital to revive the business however given the challenges in the
REL group, any support to RFL is unlikely in the short term. Till
then the liquidity for the company is likely to remain impacted.
Key rating drivers and their description
Credit challenges
* Stretched liquidity and reduced financial flexibility: Group
related issues along with company's decision to delay its debt
repayments has severely limited RFL's ability to raise any
incremental funding, impacting its liquidity and financial
position.
* Shrinking asset base with no fresh disbursements: Given the
challenges in raising incremental funds, RFL has curtailed
disbursements since FY2017. Also, RBI in its letter dated January
18, 2018, prohibited the company from expanding its
credit/investment portfolio other than investment in Government
securities. The lack of disbursements along with sale of assets and
increased provisioning against the corporate loan book led to a
decline in the net loan book to INR2,924 crore as on December 31,
2019 (vs. INR8,567 crore as on March 31, 2018).
* Deteriorating asset quality: RFL's asset quality is weak with
increased delinquencies, shrinking of the asset base along with the
recognition of the majority of the corporate loan book as NPA.
Gross NPA ratio stood at 58.4% as on December 31, 2019 (vs. 53% as
on December 31, 2018). For the SME book, the gross NPA ratio stood
at ~23% as on December 31, 2019 (vs. ~28% as on December 31, 2018).
Any further deterioration in the asset quality, and hence
collections, could further impact RFL's liquidity position given
that it has not been doing any fresh business since the last couple
of years.
Liquidity position: Poor
The liquidity position of the company is currently stretched owing
to Group related issues and challenges in raising incremental
funding. Given that the standard assets (where inflows are coming
and/or are eligible for sale) are far lower than the liabilities,
the company would not be able to repay the entire debt without any
capital support.
Rating sensitivities
* Positive triggers: Timely debt payment on sustained basis
Religare Finvest Limited (RFL) was originally incorporated as
Skylark Securities Private Limited in 1995. It was converted into a
public limited company, Fortis Finvest Limited, in 2004. In March
2006, the company changed its name to Religare Finvest Limited. RFL
is a subsidiary of Religare Enterprises Limited.
In FY2019, RFL reported a net loss of Rs1548 crore on an asset base
of INR6,961 crore compared to a net loss of INR953.19 crore on an
asset base of 11497 crore in FY2018. In 9MFY2020, the company
reported a net loss of INR726 crore on an asset base of INR6,077
crore.
RURAL FAIRPRICE: ICRA Lowers Rating on INR320cr NCD to 'D'
----------------------------------------------------------
ICRA has revised the ratings on certain bank facilities of Rural
Fairprice Wholesale Limited (RFWL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Non-convertible 320.0 [ICRA]D; revised from
Debenture [ICRA]BB+(CE) (Stable)
Programme
Non-convertible 350.0 [ICRA]D; revised from
Debenture [ICRA]BB+(CE) (Stable)
Programme
Material Event
On March 26, 2020, ICRA received a communication from the debenture
trustee regarding default by Rural Fairprice Wholesale Limited
(RFWL) on acceleration of repayment of non-convertible debenture
(NCD) of INR670 crore. However as confirmed by the debenture
trustee, there has not been any invocation of the guarantee.
Rationale
The rating revision takes into account the default by RFWL on the
accelerated repayment of INR670 crore NCD (rated by ICRA) triggered
by the event of default caused due to a sharp decline in the share
price of Future Retail Limited (FRL) and inability of the company
to top up the security cover. While these NCDs are backed by a
corporate guarantee from Future Corporate Resources Private Limited
(FCRPL), the debenture trustee has confirmed that the same has not
been invoked. ICRA notes that the matter is currently sub-judice.
Further, despite the corporate guarantee from FCRPL for RFWL's NCD
and bank lines, in ICRA's opinion, the rating does not benefit from
credit enhancement.
Key rating drivers and their description
Credit strengths – Not Applicable
Credit challenges
* Weak financial profile with high borrowing levels: The company's
financial profile is weak, with high borrowing levels mainly to
support investments in Group ventures and fund its losses.
* Overall Group debt level remains high; pledge levels in various
listed companies of the Group have also increased: Despite
monetisation of investments across various Group entities, the
total Group debt has increased as on December 31, 2019, as against
March 31, 2019. ICRA notes the increase in debt is mainly on
account of an increase in debt of the opcos, with the total debt at
the Group's listcos increased to INR12,778 crore as on September
30, 2019 from INR10,951 crore as on March 31, 2019. With continued
reduction in the share price of the Future Group listcos, the total
Group debt/market capitalisation has increased to 1.2 times as on
March 16, 2020 from 0.4 times as on March 31, 2019. Furthermore,
this has resulted in an increase in the pledged shareholding of the
promoter Group, resulting in reduced financial flexibility.
However, the Group also has investments in several unlisted
entities, which provides an opportunity to monetise investments.
Liquidity position: Poor
The company's liquidity profile is poor on account of its weak
operating performance. The total debt as on December 31, 2019 is
INR670 crore with sizeable debt repayment obligations of ~INR320.0
crore and ~INR350.0 crore in FY2022 and FY2023, respectively. The
company is making minimal profits and just turned profitable in
FY2019.
Rating sensitivities
* Positive triggers: The rating may be upgraded in case of
improvement in the credit profile of the company and the Group,
resulting in regularisation of debt servicing.
* Negative triggers: Not Applicable
Incorporated in September 2009, Rural Fairprice Wholesale Limited
is a wholly-owned subsidiary of FCRPL, which is one of the holding
companies of the Future Group. RFWL trades in all kinds of fashion,
foods, fast moving consumer goods (FMCG) and other related products
with the Future Group entities as well as others.
SHIV DAL MILL: ICRA Reaffirms B+ Rating on INR5cr Cash Loan
-----------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of M/S Shiv
Dal Mill (SDM), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund Based–
Cash Credit 5.00 [ICRA]B+ (Stable); Reaffirmed and
rating removed from ISSUER NOT
COOPERATING category
Fund Based–
Term Loan 5.00 [ICRA]B+ (Stable); Reaffirmed and
rating removed from ISSUER NOT
COOPERATING category
Rationale
The reaffirmation of the rating factors in the experience of the
promoters in the agro-product-based businesses that strengthens the
operational profile of SDM and the firm's conservative capital
structure as on March 31, 2019.
The rating is, however, constrained by the firm's small scale of
current operation due to limited geographical coverage of sales and
the fragmented and competitive nature of the pulse milling
industry, which is likely to keep the profit margin of the players,
including SDM, under check. ICRA notes the firm's vulnerability to
the price fluctuation in pulses and the risks associates with the
entity's status as a partnership firm, including the risk of
capital withdrawal by the partners. The Stable outlook on the
[ICRA]B+ rating reflects ICRA's opinion that SDM will continue to
benefit from the experience of its promoters in the
agro-product-based business.
Key rating drivers and their description
Credit strengths
* Partners' experience in agro-product based business: SDM started
its commercial operations in April 2017. The manufacturing unit has
been set up at Murshidabad, West Bengal. The partners have
experience in agro-product based businesses through other Group
entities like Shiv Rice Mill (involved in rice milling since 2008)
and Shiv Biri Manufacturing Co. Pvt. Ltd. (involved in biri
manufacturing since 1998).
* Conservative capital structure: The firm has pre-paid a
considerable amount of term loan in FY2019, which coupled with an
accretion to the partners' capital led to an improvement in its
capital structure. SDM's gearing and TOL/TNW declined to 0.83 times
and 1.20 times, respectively, as on March 31, 2019 from 1.27 times
and 1.54 times, respectively, in the previous year.
Credit challenges
* Small scale of current operations due to limited geographical
coverage of sales: SDM currently derives a major portion of its
revenue from West Bengal, mainly from the Murshidabad district. The
limited geographical coverage of sales has kept the firm's scale of
current operation at a modest level. Its capacity utilisation stood
at around 31% only in 9M FY2020.
* Fragmented and competitive nature of the industry likely to keep
margins under check: The pulse milling industry is characterised
by a highly fragmented industry structure and intense competition
due to low product differentiation, which limits the pricing
flexibility of the participants, including SDM. This is likely to
keep the profit margins of all the players in the industry,
including SDM, under check.
* Vulnerable to commodity price movements: Pulse harvesting mainly
depends on agro-climatic conditions, which impact the raw material
availability and prices. The firm also remains exposed to other
risks inherent in an agro-based business, including a shift in food
consumption pattern due to price fluctuation, changes in Government
policies in relation to the stipulation of the minimum support
price (MSP) for procurement of agro products from farmers and
revision of policies on import/export etc. While the margins remain
susceptible to the price movement of the agro products that are
subject to climatic conditions and Government intervention, the
sales volumes remain susceptible to the consumers' food consumption
patterns. In 9M FY2020, demand for pulses declined due to a
significant price rise, negatively impacting SDM's sales volumes.
* Risks associated with the entity's legal status as a partnership
firm: SDM remains exposed to the risks associated with a
partnership firm. Any significant capital withdrawals by the
partners may adversely impact the firm's net worth and liquidity.
Liquidity position: Stretched
The firm's liquidity position is stretched. Its cash flow from
operations is likely to remain modest. SDM's long-term debt
repayment obligation for FY2021 has reduced due to pre-payments
made in the previous two fiscals. Its free cash balance as on March
31, 2019 stood at a moderate level of around INR3 crore. However,
the firm's utilisation of fund-based working capital limit remained
high, as reflected by an average utilisation of 92.31% and the peak
utilisation of 99.80% during December 2018 to December 2019,
reflecting its stretched liquidity profile. SDM has plans to expand
its pulses milling capacity, for which a debt-funded capital
expenditure of around INR4 crore has been estimated. However, the
timeliness of such capital expenditure is yet to be ascertained.
Rating sensitivities
* Positive triggers: ICRA may upgrade SDM's rating if there is a
sustained improvement in the firm's scale of operation and
profitability.
* Negative triggers: Pressure on SDM's rating may arise if a
stretch in the firm's working capital cycle leads to worsening of
its liquidity profile and /or if a sizeable debt-funded capital
expenditure adversely impacts SDM's capital structure and debt
coverage metrics. A significant capital withdrawal by the partners
of the firm may also trigger a rating downgrade.
SDM was established as a partnership firm in August 2014 by Mr.
Jakir Hossain and Mr. Montu Rahaman for milling of pulses. In April
2016, Mrs. Mira Bibi joined as a partner. SDM is involved in pulse
milling of many varieties with an installed capacity of 80 metric
tonnes per day (MTPD) at its manufacturing facility located at
Murshidabad, West Bengal. The commercial operations of the facility
commenced in April 2017.
SWASTIK POWER: ICRA Reaffirms 'D' Rating on INR38cr Term Loan
-------------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Swastik
Power And Mineral Resources Private Limited (SPMRPL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund Based– 38.00 [ICRA]D; Reaffirmed and removed
Term Loans From 'Issuer not cooperating'
Category
Rationale
The reaffirmation of the rating primarily considers the continuing
delays in servicing of debt obligations by SPMRPL on account of its
poor liquidity position, leading to an overdue of principal and
interest on term loans. The rating is further constrained by the
negligible level of operations of SPMRPL,
and its weak financial risk profile, characterised by cash losses
incurred over the past three years and depressed level of coverage
indicators.
The rating, however, favourably factors in the experience of the
management in the coal washery and coal trading business.
Key rating drivers and their description
Credit strengths
* Experience of the management in coal washery and coal-trading
business: The company primarily deals in coal washery and
coal-trading business. The promoters of the company are associated
with this sector for more than two decades.
Credit challenges
* Continuing delays in timely servicing of debt obligations: The
company continues to delay in timely servicing of debt obligations
due to its poor liquidity, leading to an overdue of principal and
interest on term loans.
* Negligible level of operations: The entire operations of the
company remained closed since FY2015 due to unfavourable market
conditions. In FY2019, the company provided coal washery and other
services to one customer, generating revenues of around INR26
crore. However, in FY2020 again, there were negligible operations.
Going ahead, there is uncertainty about continuation of
operations.
* Weak financial risk profile: The company has incurred cash
losses over the past three years as there were no operations.
Consequently, the coverage indicators remained adverse during the
said period.
Liquidity position: Poor
HCCSPL's liquidity remains poor, as reflected in delays in debt
servicing obligations by the entity. In view of sizeable debt
service obligations compared to its cash accruals from the
business, the liquidity position of the company would continue to
remain poor in the near term at least.
Rating sensitivities
* Positive triggers: Regularisation of debt servicing on a
sustained basis (more than three months), following improvement in
the liquidity profile of the entity may result in a rating
upgrade.
Incorporated in 2004, SPMRPL is involved in the business of coal
washery and coal trading in the domestic market. The company has a
wet coal washery plant with a capacity of 0.9 MTPA of refined coal.
Besides, the company has a 25-MW coal-reject based power plant. The
manufacturing facilities of the company are located in Korba,
Chhattisgarh. However, there have been no operations since FY2015.
THERAPIVA PRIVATE: ICRA Assigns B- Rating to INR103.80cr Loan
-------------------------------------------------------------
ICRA has assigned rating to the bank facilities of Therapiva
Private Limited (Therapiva), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Term loans 103.80 [ICRA]B- (Stable); assigned
Long-Term Fund
based/CC 39.00 [ICRA]B- (Stable); assigned
Long-Term
Unallocated 75.20 [ICRA]B- (Stable); assigned
Rationale
The assigned rating favourably factors in the operational and
financial support that Therapiva receives from its promoters. The
company is a 61:39 joint venture (JV) between Omnicare Drugs India
Private Limited (a wholly-owned subsidiary of Neopharma
International Holding Company (Neopharma Holding), Dubai, which in
turn is owned by Dr. B.R. Shetty) and Laxai Life Sciences Pvt. Ltd
(Laxai; a contract research organisation promoted by Mr. Vamsidhar
Maddipatla). Therapiva benefits from the research and development
capabilities of Laxai and gets marketing and financial support from
from Dr. B. R. Shetty Group entities (Neopharma LLC, Dubai
providing marketing support and financial support derived from
Neopharma Holding). The company has received equity infusion of
INR30.5 crore and unsecured loans of INR156.3 crore as on March 31,
2019 from Neopharma Holding. The rating is also underpinned by the
company's healthy customer profile comprising Dr. Reddy'
Laboratories [DRL; rated [ICRA]AA+ (Stable)] and Mylan Laboratories
Private Limited, to name a few. With committed orders from DRL for
FY2020/H1 FY2021 and a healthy pipeline of active pharmaceutical
ingredients (APIs) expected to be commercialised during
FY2021–FY2023 (at present under various stages of development),
the company's revenues are likely to witness healthy improvement
going forward.
The rating is, however, constrained by the weak financial profile
of the company, characterised by operating losses of -15.3% and
-20.4% in FY2019 and H1 FY2020, respectively, weak capitalisation
and coverage indicators, and stretched liquidity. Owing to high
debt levels and relatively low net worth, the company' capital
structure and coverage indicators were stretched with adjusted1
gearing and adjusted total debt/OPBITDA of 5.1 times and -8.4
times, respectively as on September 30, 2019. Going forward, the
company has sizeable debt-funded capex of INR250.0 crore over
FY2020–FY2021, which is likely to be funded through term loans of
INR175.0 crore. The remaining is expected to be funded through
equity infusion/loans from promoters. This is likely to result in
high debt levels and the capitalisation and coverage indicators are
expected to remain stretched further going forward. ICRA notes that
the company's breakeven revenues are INR520.0 crore and it is
expected to post net losses in FY2020 and FY2021 as well. On the
liquidity front, ICRA expects the promoters to infuse funds as and
when required to meet Therapiva's repayment obligations and other
operational requirements. Akin to other pharmaceutical players, the
company remain susceptible to regulatory risks inherent in the
pharmaceutical industry.
Key rating drivers and their description
Credit strengths
* R&D capabilities, marketing and financial support received from
promoters: Therapiva is a 61:39 JV of Omnicare Drugs Private
Limited (100% subsidiary of Neopharma Holding) and Laxai Life
Sciences Private Limited (promoted by Mr. Vamsidhar Maddipatla).
The company receives R&D support from Laxai, while it receives
marketing and financial support from Dr. B. R. Shetty Group
entities (Neopharma LLC, Dubai providing marketing support and
financial support derived from Neopharma Holding). The company has
received equity infusion of INR30.5 crore and unsecured loans of
INR156.3 crore as on March 31, 2019 from Neopharma Holding. The
company's management team has several decades of experience in the
pharmaceutical business across global markets.
Healthy customer profile: The company caters to reputed companies
such as DRL and Mylan Pharmaceuticals Private Limited, to name a
few. DRL contributed to INR55.6 crore and INR57.9 crore of revenues
in FY2019 and H1 FY2020, respectively.
* Healthy revenue visibility arising from the API pipeline and
committed orders from DRL for FY2020/H1 FY2021: The company has a
two-year supply contract (ending October 2020) with DRL and has a
confirmed order book of ~INR145.0 crore in FY2020. It also has a
healthy pipeline of APIs in various stages of development in Laxai,
for which the manufacturing would be carried out by Therapiva.
These are expected to be commercialised over the next two-three
years. Committed orders from DRL and healthy API pipeline are
expected to support the company's revenues over the medium term.
Credit challenges
* Limited operational track record; modest scale of operations: The
company commenced operations in April 2018 and hence, FY2020 is its
first full year of operations. With nearly four-five months of
operations in FY2019, the company clocked INR77.0 crore of revenues
in FY2019, while it reported revenues of INR76.1 crore in H1
FY2020, limiting the operational and scale-related flexibilities.
Healthy anticipated revenue growth backed by the API pipeline and
committed orders are likely to improve the operational flexibility
over the medium term.
* Financial profile characterised by operating losses, weak
capitalisation and coverage indicators and stretched liquidity:
Owing to Therapiva's modest scale of operations and higher fixed
costs, the company incurred operating losses with operating margin
(OPM) of -15.3% and -20.4% in FY2019 and H1 FY2020, respectively.
Also, with high debt levels and relatively low net worth, the
company' capital structure and coverage indicators were stretched
with adjusted gearing and adjusted total debt/OPBDITDA of 5.1 times
and -8.4 times, respectively as on September 30, 2019. With
breakeven revenues of INR520 crore, the company is expected to
report net losses in FY2020 and FY2021 also.
* Sizeable debt-funded capex in the anvil: The company has
sizeable capex plans of INR250.0 crore to be incurred during FY2020
and FY2021 towards upgrade and expansion of one of its
manufacturing facilities. ICRA understands that the capex is
expected to be funded through debt of INR175.0 crore (untied),
while the remaining would be funded through a mix of equity and
promoter loans. With anticipated accruals and debt-funded capex,
the capitalisation and coverage indicators are expected to remain
stretched further going forward.
* Exposure to regulatory risks: Akin to other players, Therapiva
is also exposed to uncertainties in approval pathway for molecules
under development and consequent volatility in launch timelines. It
also remains vulnerable to revenue risks arising from issues in
facility approvals.
Liquidity position: Stretched
Therapiva's liquidity is stretched with operating losses, resulting
in negative cash flow from operations in FY2019 and H1 FY2020. The
company's average working capital utilisation was ~60% of the
sanctioned limits during November 2018–October 2019, while it was
over 95% for September 2019–October 2019. The company had cash
and liquid investments of INR41.8 crore as on September 30, 2019.
Therapiva has capex plans of ~INR250 crore during FY2020–FY2021,
primarily towards the expansion and upgrade of one of its
manufacturing facilities. The capex is likely to be funded through
a mix of debt of INR175 crore (untied) and equity/promoter loans.
For the term loans on its books as September 30, 2019, the company
has repayment obligations of INR4.1 crore, INR11.2 crore and
INR13.9 crore in FY2020, FY2021 and FY2022, respectively. The fund
infusion by promoters in the form of unsecured loans have supported
the liquidity during the last 12 months, and ICRA expects further
infusion of funds by the promoters to ensure timely payment of
debt-related obligations and other payables.
* Rating sensitivities Positive triggers: Scaling up operations
and profitability significantly would result in an upgrade.
Negative triggers: Inability to scale up revenues, weaker than
expected performance amidst the Covid-19 pandemic or
higher-than-expected capex leading to deterioration in debt metrics
or liquidity position could lead to a downgrade.
Therapiva Private Limited is a 61:39 JV between Omnicare Drugs
Private Limited (a 100% subsidiary of Neo Pharma LLC) and Laxai
Life Sciences Private Limited (promoted by Mr. Vamsidhar
Maddipatla). It manufactures API, intermediates and specialty
chemicals for regulated and unregulated markets. It was
incorporated in December 2017 and commenced operations in April
2018 through the acquisition of a manufacturing facility at
Pashamylaram (old factory), Hyderabad from Ogene Systems India
Limited (which was a sick unit). Therapiva bought the second
manufacturing unit at Jeedimetla, Hyderabad from DRL in November
2018. While the first manufacturing facility complies with all
regulatory guidelines and requirements of current Good
Manufacturing Practices (cGMP), the second manufacturing has
approvals from USFDA, EDQM, COFEPRIS, KFDA, MHRA and PMDA.
TINNA RUBBER: ICRA Reaffirms B+ Rating on INR22cr Cash Loan
-----------------------------------------------------------
ICRA has reaffirmed ratings on certain bank facilities of Tinna
Rubber & Infrastructure Limited (TRIL), as:
Amount
Facilities (INR crore) Ratings
---------- ----------- -------
Fund Based–
Term Loan 9.58 [ICRA]B+(Stable); Reaffirmed
Fund Based–
Cash Credit 22.00 [ICRA]B+(Stable); Reaffirmed
Non-Fund
Based Limits 14.48 [ICRA]A4; Reaffirmed
Unallocated
Limits 15.94 [ICRA]B+(Stable); Reaffirmed
Rationale
The reaffirmation of the ratings factors in the extensive
experience of the promoters of TRIL and its established track
record of more than two decades in rubber-derived products. The
ratings derive comfort from the fact that TRIL has shifted its
product profile towards more value-added products and has reduced
its dependence on the road infrastructure sector in the last few
years, which has also helped it to increase its customer base and
reduce concentration risk. Thus, the company's revenues have
continued to improve since FY2018. It has recorded operating income
(OI) of ~INR130 crore and ~INR98 crore in FY2019 and 9M FY2020,
respectively. Since FY2018, the company has received approvals from
leading tyre manufacturing companies for crumb rubber and reclaim
rubber, which have now become its major revenue generators. Thus,
its overall profitability and financial risk profile have improved
since FY2018. ICRA believes that TRIL will be able to maintain its
recent margins and increase its sales volumes going forward.
The ratings, however, continue to be constrained by the working
capital-intensive nature of operations, which keeps the working
capital limits almost fully utilised, thereby weakening the
liquidity profile. The repayment liability of the company remained
high due to the debt-funded capex incurred in the past.
To meet the funding gap arising from losses in the recent years and
scheduled repayment obligations, the company sold its non-core
assets in the last few years to raise funds. Its net profitability
was negative at -0.1% and -2.5% in FY2019 and 9M FY2020,
respectively, while the RoCE remained low at 7.1% in FY2019. The
coverage indicators also remained weak with interest coverage and
DSCR of 1.5 times and 1.0 times, respectively in FY2019. The
ratings also factor in the exposure of the company's profitability
to adverse volatility in the raw material prices as the company's
raw material requirements are mainly met through imports. However,
the risk is mitigated by reduced dependence of the company on
imports and procurement of raw material domestically.
The Stable outlook on the [ICRA]B+ rating reflects ICRA's opinion
that TRIL will continue to benefit from its experienced management
and long track record of operations.
Key rating drivers and their description
Credit strengths
* Extensive experience of promoters in rubber-derived products
business: The promoters have been involved in manufacturing
rubber-derived products for more than two decades and have gained a
thorough knowledge of the market. Such a long presence in the
industry has helped the company in understanding the industry
dynamics and continuous focus on research and development has
helped it in establishing strong relationships with the key
customers.
* Diversification of product-mix as well as consumer mix: The
company has diversified its product profile that includes reclaim
rubber, high grade crumb rubber, cut wire shots, etc. It has also
added some highly reputed tyre companies in its customer profile
and hase received approvals for raw material supply to them same.
This has aided it in increasing the sales volume and in turn, its
revenues. Thus, it achieved OI of ~INR130 crore and ~INR98 crore in
FY2019 and 9M FY2020, respectively.
Credit challenges
* Negative net profitability, low return indicators and weak
coverage indicators: The company has been incurring net losses
since FY2017 because of slowdown and has not been able to achieve
profits at the net level since then. Its net profitability was
negative at -0.1% and -2.5% in FY2019 and 9M FY2020, respectively.
Its return indicators and coverage indicators were also low with
RoCE of 7.1%, interest coverage of 1.5 times and DSCR of 1.0 times
in FY2019. These factors keep the overall financial risk profile
stretched, but it are expected to improve with the ramp-up of the
company's operations.
* Exposure to volatility in raw material prices affect margins: As
the company's raw material requirements are met mainly through
imports, its profitability is largely affected by raw material
price fluctuation. This in turn affects sales realisations and
margins. However, the company has been trying to mitigate the risk
by reducing its dependence of on imports and procuring raw material
domestically.
* Stretched working capital cycle leading to almost full
utilisation of working capital limits and weakening liquidity: The
company has moderate-to-high working capital intensity, which
impacts its liquidity as reflected by the almost full utilisation
of its working capital limits. Hence, due to very low cushion in
limits and limited cash balances, its overall liquidity profile
also remains weak. However, the working capital cycle have improved
in FY2019 with NWC/OI of ~29% compared to ~40% in FY2018.
Liquidity position: Stretched
The liquidity position is stretched on account of moderate-to-high
working capital intensity leading to almost full utilisation of
working capital limits, which averaged at 95% for the 12-month
period ending in February 2020. There exists considerable
debt-repayment obligations and the cash balance remains at INR0.3
crore as on September 30, 2019.
Rating sensitivities
* Positive triggers: ICRA's could upgrade TRIL's ratings if
substantial growth in revenues coupled with improvement in
profitability and return indicators strengthen its overall
financial risk profile. A specific credit metric that could lead to
an upgrade is interest coverage higher than 2 times on a sustained
basis.
* Negative triggers: Any further stretch in working capital cycle
weakening liquidity profile could lead to downgrade in ratings.
Tinna Overseas Ltd. (formed in 1987), now renamed Tinna Rubber &
Infrastructure Limited (TRIL), is in the business of bituminous
products, specialising in bitumen modifiers of various types such
as crumb rubber, polymer modified bitumen and bitumen emulsions.
The company also has crumb rubber manufacturing facility in three
of its existing plants. It has manufacturing facilities at Panipat,
Kadam, Haldia, Chennai and Wada. However, due to the slowdown in
the infrastructure industry in the past few years, the company has
diversified its product mix to reduce it dependency on the sector.
Its current product profile includes ultra fine tyre crumb, high
tensile reclaim rubber, carbon steel shots, steep scrap, CRMB, and
bitumen emulsion.
WRITER LIFESTYLE: Ind-Ra Places BB+ Issuer Rating on Watch Negative
-------------------------------------------------------------------
India Ratings and Research (Ind-Ra) has placed Writer Lifestyle
Private Limited's (WLPL) Long-Term Issuer Rating of 'IND BB+' on
Rating Watch Negative (RWN). The Outlook was Negative.
The instrument-wise rating actions are:
-- INR890 mil. (reduced from INR1.20 bil.) Term loan due on
September 2022 placed on RWN with IND BB+/RWN rating; and
-- INR150 mil. Bank overdraft assigned; placed on RWN with IND
A4+/RWN rating.
Analytical Approach: Ind-Ra continues to take a consolidated view
of WLPL and its parent P.N. Writer & Company Pvt. Ltd. (PNW; 'IND
BB+'/RWN) in view of the strong legal, operational and strategic
linkages between the entities.
KEY RATING DRIVERS
On a standalone basis, PNW holds real estate assets such as
commercial properties and residential apartments. The company
derives rental income from these properties, which is likely to
remain stable despite the ongoing COVID-19 crisis.
The RWN reflects the government-imposed travel ban and complete
lockdown to combat the outbreak of COVID-19, which is likely to
impact WLPL's operating performance in FY21. This would adversely
affect PNW, as it derives a significant portion of its revenue from
the hospitality segment under WLPL. The RWN also factors in the
continued uncertainty regarding any pick-up in demand even after
the threat of COVID-19 subsides, which could delay recovery in the
sector.
The ratings reflect the small scale of operations, with
consolidated revenue of INR463 million in FY19. As of 9MFY20, the
consolidated revenue amounted to INR360 million. While the revenue
had stood at INR1,188 million in FY18, the company had divested its
entire stake of 100% in its Dubai-based subsidiary in March 2018
(P.N. Writer and Company Limited) as a part of the business
restructuring carried out at the group level. Hence, the revenue
and EBITDA figures for FY19 and FY18 are not wholly comparable.
On a consolidated basis, PNW reported an EBITDA profit of INR15
million in 9MFY20, as against EBITDA losses of INR24 million in
FY19 (FY18: INR56 million), due to improved control over costs.
Consequently, the interest coverage improved to 0.1x in 9MFY20. The
operational performance also improved as occupancy levels at the
Hilton Shillim Retreat and Spa in Lonavala rose to 54% in 9MFY20
from 52% in FY19 (FY18: 49%). While the agency believes the EBITDA
is likely to have been positive in FY20, the impact of COVID-19 on
the operations at the Hilton Shillim estate could impact
profitability in FY21.
On a standalone basis, WLPL has a weak but improving financial
profile. The company's standalone revenue increased to INR398
million in FY19 (FY18: INR334 million); in 9MFY20, the revenue
stood at INR310 million. The Hilton Shillim Estate recorded an
EBITDA profit of INR14 million in 9MFY20, after having witnessed
losses in FY19 and FY18. However, if corporate costs are included,
WLPL's EBITDA remained negative at INR26 million in 9MFY20, though
the losses have narrowed as compared to the previous years (FY19:
negative INR70 million; FY18: negative INR86 million).
At FYE19, PNW had a consolidated debt of INR2,905 million (FYE18:
INR2,746 million); of this, about INR1,249 million had been
extended by either the promoters or group companies. The management
has informed the agency that either the promoters or other group
companies will extend tangible support to PNW, in case the company
makes losses. Moreover, the management is planning to sell owned
residential properties in Bandra, warehouses in Maharashtra, and
villas being developed in a land bank in Lonavala (around 84 acres)
in the near term to reduce debt.
Liquidity Indicator - Poor: The consolidated cash flow from
operations remained negative at INR152 million in FY19 (FY18:
negative INR429 million) owing to continued operating losses and
high-interest expenses. Consolidated cash and bank balances
amounted to INR22 million at end-FY19 (FY18: INR95 million) against
a scheduled consolidated debt repayment of INR220 million in FY20.
The ratings benefit from the likely support in the form of loans
and advances from either the promoters or other group companies to
PNW, in case of financial losses. In FY19, PNW received incremental
loans of INR455.5 million from the promoters and other group
companies.
RATING SENSITIVITIES
The RWN indicates that the rating may be affirmed or downgraded.
The RWN will be resolved once the agency receives greater clarity
on the lifting of the COVID-19-related shutdown and the impact of
the same on Ind-Ra's base case estimates.
COMPANY PROFILE
PNW is a part of the Mumbai-based Writer Corporation group, which
is engaged in diversified businesses such as relocation services,
information and records management services, cash management
services, and hospitality.
As a standalone entity, PNW derives revenue through rental income
from a residential property in Bandra West, Mumbai (St. Leo
Apartments; a seven-story building with an area of 857 square
meters) and some commercial properties leased to Writer Business
Services.
WLPL, a wholly-owned subsidiary of PNW, engaged in the hospitality
business. It has a luxury resort, Hilton Shillim Estate Retreat,
and Spa, in Lonavala, near Mumbai. It is also involved in the real
estate business and has been constructing villas in Shillim,
Lonavala, for sale.
=================
I N D O N E S I A
=================
ALAM SUTERA: Fitch Cuts LongTerm IDR to 'B-', On Watch Negative
---------------------------------------------------------------
Fitch Ratings has downgraded Indonesia-based property developer PT
Alam Sutera Realty Tbk's Long-Term Issuer Default Rating to 'B-'
from 'B' and all ratings have been placed on Rating Watch Negative.
ASRI's USD175 million notes due 2021 and USD370 million notes due
2022, issued by wholly owned subsidiary Alam Synergy Pte Ltd and
guaranteed by ASRI and several of its subsidiaries, have been
downgraded to 'B-' from 'B' while the Recovery Rating on the notes
remains at 'RR4'.
The downgrade reflects Fitch's view that ASRI faces increasing
refinancing risk. ASRI's cash balance and operating cash flow are
going to fall short to meet the repayment of its USD175 million
bond maturing in April 2021, and Fitch believes ASRI's refinancing
options, both onshore and offshore, have reduced significantly amid
the current coronavirus pandemic. Domestic banks are likely to
prioritize preserving liquidity while capital market appetite for
emerging-market securities has weakened due to the COVID-19
outbreak.
The company has currently raised about IDR1 trillion, comprising
IDR700 billion of secured bank loans and matured call spread
options, which will be used to repay USD60 million of the USD175
million bond when the bond turns callable in April 22, 2020. Fitch
believes the tight funding conditions will make it challenging for
the company to secure funds to meet its debt maturities in the next
12 months. This risk is captured in the RWN.
ASRI indicated that the company is in negotiations to secure
sufficient funds to repay the bond, although these negotiations are
increasingly protracted. Fitch may consider removing the RWN if the
company is able to complete the refinancing.
KEY RATING DRIVERS
Pandemic Restricts Refinancing: Fitch believes ASRI's access to
banks and capital markets is constrained amid economic and
financial turmoil arising from the coronavirus pandemic. The
Indonesian rupiah has depreciated significantly in the year to date
and liquidity in the capital market has shrunk, especially for
non-investment grade companies. Domestic banks face significant
near-term asset-quality pressure and are likely to focus on
preserving liquidity and prioritizing higher-quality credits in
their books. All these significantly heighten ASRI's refinancing
risk.
ASRI's nearest significant maturity is its USD175 million bond due
April 2021. The company also has a USD370 million maturity in April
2022. Despite these challenges, Fitch believes ASRI still has
levers at its disposal, in particular its land bank, which could be
used as security as part of a financing package by domestic banks.
Negative Sector Outlook: Fitch revised its outlook on the
Indonesian homebuilding sector to negative as Fitch expects weaker
demand for property. In line with its sector outlook, Fitch has cut
its forecast for ASRI's attributable presales in 2020 to IDR1.3
trillion from IDR2.1 trillion, assuming sales in 2Q20 drop by over
50% yoy and sales in 2H20 fall by 30%-40%. Fitch has also assumed
demand to only start recovering in 1H21 and a close-to-full
recovery by 2H21, which results in a forecast of attributable
presales of IDR1.7 trillion in 2021. Fitch also expects some delays
in presales collection for 2Q20-4Q20 as some buyers may defer
payments.
Lower Bulk Land Sales: ASRI's cash flow and liquidity have
historically benefitted from its partnership with China Fortune
Land Development Co., Ltd. (CFLD; BB-/Stable), under which CFLD
buys land from ASRI's land bank in the Pasar Kemis area, which
helped to make up for slow presales during market weakness.
However, Fitch expects sales to CFLD to slow, which should result
in weaker CFFO generation. Fitch forecasts ASRI will generate, on
average, negative-to-neutral CFFO and negative free cash flow in
the medium term, assuming that the company successfully refinances
the 2021 bond.
The land sales to CFLD previously helped offset slow presales as
property demand slipped, although it came at the cost of higher
customer concentration and lower overall potential realization from
ASRI's land bank. Fitch believes CFLD's involvement accelerated the
development and achievement of critical mass at the Suvarna Sutera
township, which should support new sales from the township in the
medium term. Presales contribution from the township, excluding the
land sales to CFLD, rose to 34% in 2019 from 17% in 2016, and Fitch
expects this to improve further to around 50% for the next four
years.
Established Township, Solid Land Bank: ASRI's rating reflects its
view that the company's business risk profile is supported by its
robust market position in Indonesia, sizeable low-cost land bank,
quality assets and established domestic franchise. The company has
an ample low-cost land bank of over 2,000 hectares to meet future
sales, including more than 100 hectares of land in its prime and
established Alam Sutera township and over 1,500 hectares in its
Suvarna Sutera township, all with a carrying book value of around
IDR11 trillion at end-September 2019 and equivalent to 40-50 years
of land-bank life.
DERIVATION SUMMARY
ASRI's Long Term IDR is comparable with those of peers, such as PT
Lippo Karawaci TBK (B-/Negative), PT Agung Podomoro Land Tbk (APLN,
CCC+), PT Modernland Realty Tbk (B/Stable) and PT Kawasan Industri
Jababeka Tbk (B/Stable).
Fitch believes ASRI and Modernland are similarly established in
executing residential township projects. Modernland's larger
attributable presales scale and more strategically located
townships, based on distance to Jakarta's CBD, than ASRI are
counterbalanced by its higher exposure to more volatile industrial
land sales and its weaker financial profile, indicated by higher
leverage and thinner profit margins.
Fitch believes Jababeka's property development profile is weaker
than that of ASRI. Jababeka's main estate in Cikarang is better
located and more mature than ASRI's township in Pasar Kemis, but
there is also a greater degree of competition. Fitch also believes
ASRI's residential and commercial township in Serpong is more
strategically located and commands a premium compared with
Jababeka's nascent second estate in Kendal, central Java, although
Fitch thinks Jababeka's stronger and more stable non-development
interest coverage, which stems from its 20-year power-purchase
agreement with the state electricity company, compensates for its
weaker development profile.
ASRI is rated one notch below Modernland and Jababeka due to higher
refinancing risks related to its maturing bond and weaker liquidity
position.
Lippo has a better liquidity position than ASRI, as it has no large
debt maturities until 2025, sufficient cash on hand to meet
operating costs over a 12-15-month period and an adequate land bank
to support its efforts to revive property presales in the medium
term. Nevertheless, ASRI has a stronger business risk profile
reflected in higher presales and healthy operating cash flows in
the medium term supported by a higher mix of landed houses, as well
as its large land bank, compared with the higher execution risks on
Lippo's new projects. Thus, Fitch believes both companies have a
similar credit profile.
ASRI and APLN have similar property presales of IDR1.5 trillion-2.0
trillion a year. However, this is insufficient for APLN to cover
the largely committed construction costs on its high-rise projects
and its interest expense, leading to a sustained negative CFFO
generation over the medium term. This, combined with ASRI's lower
leverage and healthier CFFO generation, warrants a higher rating
than APLN.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Attributable property presales of IDR1.3 trillion in 2020
- EBITDA margins of 35%-40% in 2020-2021
- ASRI to spend IDR150 billion-300 billion on discretionary land
banking in 2020-2021
KEY RECOVERY RATING ASSUMPTIONS
- The recovery analysis assumes ASRI will be liquidated in a
bankruptcy rather than continue as a going concern because it is an
asset-trading company
- To estimate liquidation value Fitch has assumed a 75% advance
rate against the value of accounts receivable and a 50% advance
rate against inventory and investment properties. Fitch believes
the company's reported land bank value, which is based on
historical land cost, is at a significant discount to current
market value and, thus, is already conservative. Based on the 3Q19
financials, the average book value of the land was around
IDR560,000/sqm, significantly lower than the residential land lot
price at Serpong of around IDR13 million/sqm and around IDR5
million/sqm at Pasar Kemis in 2019.
- Fitch has assumed that ASRI's approximately IDR500 billion of
secured bank loans outstanding as of September 2019 will rank prior
to its USD545 million senior unsecured notes in a liquidation
- Fitch has deducted 10% of the resulting liquidation value for
administrative claims
- The above estimates result in a recovery rate corresponding to
an 'RR1' recovery rating for ASRI's senior unsecured notes.
Nevertheless, Fitch has rated the senior notes at 'B-' with a
Recovery Rating of 'RR4' because under Fitch's Country-Specific
Treatment of Recovery Ratings criteria, Indonesia falls into 'Group
D' of creditor friendliness. Instrument ratings of issuers with
assets in this group are subject to a soft cap at the issuer's
IDR.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Inability to secure sufficient financing in the next 6 months
to refinance USD175 million bond
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- ASRI secures sufficient financing to refinance its near-term
maturities
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
High Refinancing Risks: ASRI face significant maturing debt in the
next 12 months, including its USD175 million bond due April 2021.
The company plans to repay USD60 million of its 2021 bond in April
2020 through IDR700 billion of rupiah-denominated secured bank
loans and around USD25 million of cash inflow from its matured call
spread options.
However, to date, the company has not secured sufficient funding
for the remaining amount. The company indicated that it is in
negotiations with banks to secure funding, but Fitch believes
ASRI's banking and capital market access is constrained by the
effects from the pandemic. The RWN reflects the significant
increase in refinancing risk over the next six months.
BAYAN RESOURCES: Fitch Affirms BB- LongTerm IDR, Outlook Stable
---------------------------------------------------------------
Fitch Ratings has affirmed the Long-Term Issuer Default Rating of
Indonesian coal miner PT Bayan Resources Tbk and the rating on its
outstanding bonds at 'BB-'. The Outlook on the IDR is Stable.
The affirmation reflects its view that Bayan's credit profile
remains adequate for its current rating level, even as Fitch has
lowered its coal price and volume assumptions. Fitch cut Bayan's
selling prices following the revision of its commodity price
assumptions. Fitch has also revised down its sales volume forecast
to 28.5 million tons in 2020 following its expectations of
weakening demand due to the coronavirus. Fitch expects volume to
rise to 31.5MT in 2021 and remain at these levels over the next
three years compared with its previous expectation of production
reaching 40MT by 2022. The medium-term volume revision is in line
with the company's revised guidance to keep production flat before
it completes the construction of a hauling road at its mine.
Bayan's rating reflects the low-cost position of its key coal mine,
adequate reserves, diversified customer base and a strong financial
profile. This is partially offset by mine concentration, regulatory
risks and the cyclical nature of the coal industry.
KEY RATING DRIVERS
Temporary Suspension of Production: Fitch expects Bayan to be able
to maintain its credit profile even as its stops production at its
key Bara Tabang mine for seven weeks. Bayan has continued its
sales, reducing the 7.6MT of inventory built up from last year.
Bayan faced intermittent operational challenges in 2019 in shipping
coal from Bara Tabang due to low river levels. It implemented a
month-long force majeure in March and faced similar issues in 4Q19,
leading to the high inventory build-up. Fitch expects Bayan to
resume to normal production in mid-May 2020 once inventory levels
normalise.
Weaker Volume: Fitch expects the company's sales volume to fall
marginally in 2020 from 2019 due to weaker demand from the economic
slowdown caused by the coronavirus pandemic. Volume in 2019 dropped
by about 3MT from the company's estimate due to the problems it
faced from the low river levels. Fitch has also lowered Bayan's
volume assumptions for 2021-2022 as management now plans to ramp up
production after completing the construction of the 100km direct
coal-haul road from its Tabang mine to the Mahakam River to provide
an alternative route to ship its coal.
The company started building the road in non-forested areas in
December 2019 and expects to complete the project by end-2022,
subject to timely receipt of permits. The road will help Bayan
reduce operational risks related to low water levels at the
tributaries used for barging coal to the Mahakam River.
Low-Cost Position: Bayan benefits from the low-cost structure at
Bara Tabang, helped by the company's Tabang concessions. Their
average life-of-mine strip ratio of around 3.6x (2019: 3.1x) along
with the well-connected infrastructure and logistics of Bayan's
mines contribute to its low-cost structure. Bayan's other mines,
which have stable production levels, have higher cost structures
and are more vulnerable to lower coal prices. Fitch estimates
Bayan's average cash cost to remain between USD33-35, translating
into an EDITDA of USD7/ton in 2020 and USD10-11/ton in 2021 and
2022, which will remain higher than that of most of its peers in
Indonesia.
Strong Financial Profile: Fitch expects Bayan's financial profile
to continue to remain strong, even as it incorporates Fitch's
revised coal price assumptions, supported by its steady production
volume, modest capex and low-cost position. Bayan's payment of a
dividend of USD300 million in 2019 and higher working-capital debt
changed its net cash position to net debt, which Fitch did not
expect to reverse over the next three years.
Fitch expects the FFO net leverage to rise to about 2.4x in 2020
(2019: 1.6x) and fall back to 0.8x in 2021, which remains below its
negative rating triggers. The increase in Bayan's leverage in 2019
was also partly on account of higher tax payments, which Fitch
expects to be reversed over the next few years.
Customer Diversification: Fitch expects Bayan's diversified
customer base to continue to support stable demand for its coal
over the medium term after the temporary weakness in 2020 due to
the pandemic. Bayan's customer base is geographically more
diversified than those of most peers. Bayan's exports were mainly
to India (25%), the Philippines (20%), Malaysia (14%) and China
(11%) in 2019. It also has a diverse product offering, as its coal
ranges from Tabang's 4000-4300kcal low-sulphur and ash content coal
to high calorific value (over 6000kcal) coal from its other mines.
Adequate Reserves: Bayan's proved (1P) reserves are 612MT, which
result in reserve life of around 15 years based on the planned
increase in production to around 40MT over the medium term and the
1P reserves. Bayan's proven and probably (2P) reserves rose to
about 964MT, excluding the South Pakar concession, from 764MT at
end-2018 after the company completed a feasibility study in the
North Pakar region. Fitch estimates Bayan's reserve life based on
the 2P reserves at around 25 years, higher than its previous
estimate of 15 years based on its medium-term production scale of
40MT.
Limited Mine Diversity: Tabang, including North Pakar, accounts for
more than three-quarters of Bayan's 2P reserves and total
production. Fitch expects Tabang's contribution to remain high in
the medium term, as most of the ramp-up in production is likely to
come from existing operational mines at Tabang and the North Pakar
concession. That said, Fitch believes risks related to Bayan's
coal-mining operations are minimised by its contracts with PT
Petrosea Tbk and PT Bukit Makmur Mandiri Utama (BB-/Stable), two of
Indonesia's largest coal-mining contractors.
Cyclicality of Coal Industry: Bayan remains vulnerable to the
commodity cycle, as its earnings and cash flow are linked to the
thermal coal industry. However, these risks are mitigated by the
low-cost position of its key mine.
DERIVATION SUMMARY
Bayan's closest peer is PT Indika Energy Tbk (BB-/Negative). The
two companies have comparable operational risk profiles. Indika's
larger production scale, the longer operating record of its key
coal asset - Kideco Jaya Agung - and integrated operations are
offset by Bayan's better cost position and stronger financial
profile with lower sensitivity to price and volume assumptions.
However, Bayan has faced operational disruptions due to
bottlenecks, whereas Indika's operations are more integrated and
have a stronger record of uninterrupted production.
Golden Energy and Resources Limited (GEAR, B+/Stable) has higher
reserves and reserve life than Bayan, but Bayan's higher rating
reflects larger production scale and better cost structure. GEAR's
financial profile is also weaker than that of Bayan, driven by its
acquisition capex. GEAR's rating is constrained until it is able to
generate higher earnings.
KEY ASSUMPTIONS
- Steady production and sales volume at 31.5MT after temporary
weakness in 2020, with 2020 sales of 28.5MT, which include 24.5MT
of production and 4MT of inventory
- Selling prices in line with Fitch's revised coal price
assumptions with Newcastle at USD63/ton in 2020 and USD72/ton
thereafter
- Total cash cost of USD33-35/ton during 2020-2022
- Capex of USD105 million-110 million per year, which includes
USD25 million of maintenance capex and the remainder for expansion
- Dividend payout ratio of 60%
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Increase in scale to about 40MT a year, with an average
remaining reserve life of around 15-20 years, while maintaining a
low-cost position and stable financial profile, with funds from
operations net leverage below 1.5x
- Material progress towards infrastructure enhancement to ensure
continuity of operations, limiting the company's exposure to
weather-related issues.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Weaker cash-flow generation than Fitch expects due to adverse
industry conditions, higher capex or larger-than-expected cash
outflow leading to a deterioration of credit metrics for a
sustained period
- FFO net leverage above 2.5x
- FFO fixed-charge coverage falling below 4.0x
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Bayan's USD400 million bond is the company's
only major debt, as it was used to repay all its outstanding
short-term loans used for working-capital purposes. Bayan's
liquidity position improved after it issued the bond earlier this
year, refinancing most of its short-term debt, which had increased
substantially in 2019 as the company's working capital requirements
increased with the inventory build-up. Bayan paid a dividend of
USD300 million in July 2019, or a payout of 52% based on 2018 net
income, which led to a net debt position for 2019, which is likely
to continue over the next two to three years. Fitch did not expect
the company to require any additional funding support over the next
two to three years as it had a cash balance of USD175million as of
December 2019 and funds from the recently bond issuance. Fitch also
thinks Bayan has some flexibility to cut its capex and dividend
payouts if needed.
BUANA LINTAS: Fitch Alters Outlook on 'B+' LT IDR to Negative
-------------------------------------------------------------
Fitch Ratings has revised the Outlook on Indonesia-based tanker
operator PT Buana Lintas Lautan Tbk to Negative from Stable, while
affirming the Long-Term Issuer Default Rating at 'B+'. Fitch
Ratings Indonesia has affirmed the National Long-Term Rating at
'A-(idn)' while also revising the Outlook to Negative from Stable.
The Outlook revision reflects emerging risks to BULL's financial
profile. BULL's FFO gross leverage increased to above 4x in 2019
(2018: 3.0x), which was higher than its expectations, and also
above the threshold where Fitch would consider negative rating
action. The elevated leverage also coincides with a higher mix of
spot-rate contracts for the company's fleet, and sustained spending
on fleet expansion could hamper deleveraging to a level consistent
with the rating. Fitch believes the risks of the coronavirus having
a material impact on demand for BULL's ships are low as its fleet
is mainly geared towards crude oil transportation and its largest
customer is state-owned oil major, PT Pertamina (Persero)
(BBB/Stable).
BULL has indicated a strategy of having at least 90% of revenue
from time-charter contracts, which in its view, provide good cash
flow visibility. However, Fitch estimates that revenue linked to
volatile spot rates are likely to increase from well below 10% in
2019 to above 15% in 2Q20 with the assignment of three recently
acquired ships to a pool, before declining to just over 10% by 1Q21
based on an assumption of a moderation in rates. Spot rates are
favorable currently, although they can be volatile and potentially
have a significant financial impact.
BULL's rating incorporates a still-high share of time-charter
contracts, an outlook for steady demand growth in the domestic
market, which is protected from foreign competition by cabotage
laws and a strong relationship with demand driver Pertamina,
counterbalanced by a relatively small and old fleet.
'A' National Ratings denote expectations of low default risk
relative to other issuers or obligations in the same country.
However, changes in circumstances or economic conditions may affect
the capacity for timely repayment to a greater degree than is the
case for financial commitments denoted by a higher rated category.
KEY RATING DRIVERS
Spot Rate Exposure Increases: BULL had 24 of its 25 ships, or 93%
of its fleet capacity, under standard time-charter contracts as of
end-2019 while one tanker was part of a pool of ships managed by a
pool operator and earned revenue based on spot rates. Fitch
estimates that the share of BULL's fleet capacity managed by the
pool operator will increase to 14% by end-2Q20 with three out of 33
ships being part of the pool. BULL would also have two ships
constituting 10% of its capacity under time-charter contracts with
a base rate and upside if spot rates are higher. Thus, around 25%
of BULL's fleet would have exposure to spot rates by end-2Q20.
Spot rates are more volatile and may decline even though they are
currently significantly higher than BULL's time-charter rates. Time
charters with rates linked to spot will allow BULL to take
advantage of better spot rates and protect it from a sharp drop,
but they lower its revenue visibility, in its view.
Risks from Rapid Fleet Growth: BULL's fleet has almost doubled from
17 ships as of end-2018. Of the 16 ships acquired since 2018, nine
were purchased from the market while seven were part of a
subsidiary acquisition, and Fitch expects only six of them to have
time charters from Pertamina by end-2Q20. Fitch expects sustained
fleet expansion over the next three-four years and Fitch thinks
rate volatility could lead to higher leverage in some years, though
management has committed to maintaining gross debt to EBITDA below
3.5x. BULL may also need to seek new counterparties once existing
contracts end if its fleet grows faster than Pertamina's stable
demand and a higher share of its fleet is chartered by third
parties.
Revenue Stability Offsets Concentration Risks: Pertamina, as BULL's
largest customer, contributed around 60% of the company's 2019
revenue directly after excluding BULL's floating production storage
and offloading vessel employed by a joint operation involving
Pertamina. This exposes BULL to the risk of the national oil
company not renewing contracts, not granting new contracts or
defaulting on its payments. However, Fitch believes these risks are
negated by the stable demand growth outlook for oil and its
transportation in Indonesia, BULL's long-standing relationship with
Pertamina, Pertamina's robust credit profile and BULL's healthy
operating history. Therefore, Fitch expects most of BULL's
time-charter contracts with Pertamina to be extended upon their
expiry and day rates will be largely stable.
Old Fleet, Small Size: Fitch estimates the average age of BULL's
fleet, weighted by capacity, will be around 17 years as of end-June
2020, against a typical useful ship life of 25-30 years. The
company's fleet-age profile corresponds with its strategy of
operating older ships, the norm in Indonesia's market. The average
age of Indonesian-flagged vessels is more than 20 years. However,
older vessels usually earn shorter time-charter contracts than
newer vessels, are more costly to maintain, have lower utilisation
rates and are more prone to operational issues. BULL's fleet of 33
ships is also small relative to global peers.
Some Deleveraging, Negative FCF: Fitch estimates FFO gross leverage
will moderate to 2.9x in 2020, from 4.3x in 2019, driven by a jump
in EBITDA due to higher fleet capacity and relatively high spot
rates. Thereafter, Fitch forecasts leverage to increase to 3.8x in
2021 due to lower EBITDA based on an assumption that spot rates
will moderate but BULL acquires another five ships for USD100
million. Fitch also estimates that robust operating cash flows will
be offset by spending on vessel purchases, resulting in negative
free cash f low. The company says it intends to reduce capex should
rates decline. Fitch has not assumed any equity inflows in its
forecasts after rights issues in 2017-2019.
DERIVATION SUMMARY
BULL's rating can be compared with that of PT Soechi Lines Tbk
(B/Stable), which is a very close peer focusing on oil
transportation in Indonesia. Soechi had a fleet of 39 ships as of
September 2019, with an average age, weighted by capacity, of
around 20 years. Soechi's fleet under time-charter contracts was
high at 97% at end-September 2019 and Pertamina is also the largest
customer. Soechi's fleet size is larger than BULL's, but the
average age is slightly higher. Fitch expects Soechi's FFO gross
leverage to remain higher than BULL's at around 4.5x on average
over 2019-2021, signifying a weaker financial profile.
BULL can also be compared with PAO Sovcomflot (BB+/Stable), whose
Standalone Credit Profile of 'bb' benefits from a one-notch uplift
due to strong support from the Russian government (BBB/Stable). The
company engages in shipping of oil, oil products and gas and
provision of offshore services. The company's fleet, owned and
chartered, specialises in transportation in challenging icy
conditions and includes 147 vessels with an average age of around
nine years. Its customer base is diversified and consists of large
international and Russian oil and gas companies. Sovcomflot's
significantly stronger business profile justifies a higher rating,
despite FFO gross leverage being higher than that of BULL in 2018.
BULL's national rating can be compared with that of PT Aneka Gas
Industri Tbk (A-(idn)/Stable). Aneka Gas is the largest industrial
gas manufacturer in Indonesia, accounting for around a third of the
country's consumption. Around 70% of Aneka Gas' revenue is derived
via long-term supply contracts, which typically span five to 15
years, and allow for adjustments when input costs change. Its
EBITDA margin has been stable at around 30%. However, its FFO gross
leverage is estimated by Fitch to be higher than BULL's at around
4.5x on average over 2019-2021. Aneka Gas' better business profile
due to longer term contracts is offset by higher leverage, in its
view. Therefore, Fitch has rated both BULL and Aneka Gas at the
same level.
KEY ASSUMPTIONS
- Deadweight tonnage capacity to increase at a CAGR of 30% over
2020-2022.
- Standard time-charter day rates to stay broadly flat, while
spot rates to decline to their long-term average by 2021.
- Average annual capex, including upfront docking charges, of
around USD125 million over 2020-2022.
- Direct costs for vessel operations, excluding port charges and
bunker fuel, to decline by 2% per year after adjusting for an
increase in fleet capacity due to efficiencies of operating larger
ships.
- Administrative expenses to increase by 7% per year from 2019.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- FFO gross leverage above 3.8x on a sustained basis;
- Reduction in share of fleet capacity under fixed-rate time
charter contracts to below 75%, or substantial deterioration of the
operating environment;
- FFO fixed-charge cover below 3x on a sustained basis;
- Weakening of the liquidity position.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Fitch may revise the Outlook to Stable if performance is better
than the sensitivities for negative rating action
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: BULL had readily available cash of USD6
million as of end-2019, compared with current maturities of
long-term loans of USD48 million and a short-term loan of USD9
million. BULL also had USD29.5 million invested in a fund named
Suisse Charter Investment Ltd., which Fitch has not included as
readily available cash. BULL had total long-term debt of USD227
million consisting of secured bank loans.
BULL's fleet expansion plans should result in significant negative
FCF. However, Fitch thinks BULL will be able to manage its
liquidity based on its analysis, which excludes the impact of
further vessel purchases that are discretionary. Residual
refinancing risk for BULL should be manageable due to adequate
appraisal value of its ships. The appraised value of 25 ships as of
end-2019 was around USD360 million, according to BULL, and a
loan-to-value ratio of 70% justifies secured loans of around USD250
million.
SUMMARY OF FINANCIAL ADJUSTMENTS
Key financial adjustments include:
- Unamortized transaction costs (2019: USD1.2 million) have been
added back to debt.
- Advances to ship manager, prepaid insurance and accrued
expenses for vessel operations and docking have been included under
working capital.
- Income-tax expense in income statement and tax paid in cash
flow statement have been increased to reflect applicable tax on
shipping revenues in Indonesia. Corresponding offsetting
adjustments have been made to operating expense items.
BUKIT MAKMUR: Moody's Alters Outlook on Ba3 CFR to Negative
-----------------------------------------------------------
Moody's Investors Service has affirmed Bukit Makmur Mandiri Utama
(P.T.)'s Ba3 corporate family rating and the Ba3 rating on its
senior secured notes.
At the same time, Moody's has revised the outlook on these ratings
to negative from stable.
RATINGS RATIONALE
"The change in BUMA's outlook to negative from stable reflects its
expectations that amid an already challenging operating
environment, BUMA's credit metrics and liquidity will weaken
further following the loss of a key customer," says Maisam Hasnain,
a Moody's Assistant Vice President and Analyst.
"At the same time, the affirmation of BUMA's Ba3 ratings reflect
its (1) position as Indonesia's second-largest coal mining services
contractor by overburden volume, with a well-recognized franchise
and established relationships with Indonesia's largest coal miners;
and (2) its expectation that BUMA will maintain a prudent capital
structure with conservative financial policies," adds Hasnain, who
is also Moody's Lead Analyst for BUMA.
BUMA's mining service contract with its third largest customer,
Kideco Jaya Agung (P.T.), a subsidiary of Indika Energy Tbk (P.T.)
(Ba3 stable) will not be extended this year. This is because Indika
has decided to gradually transfer mining services at Kideco from
BUMA to its own mining contractor in the coming months. Moody's
previously expected that the Kideco contract, which generated 9% of
BUMA's consolidated revenues in 2019, would be renewed at broadly
similar terms.
As a result of the expiring Kideco contract, Moody's expects BUMA's
adjusted leverage -- as measured by adjusted debt/EBITDA -- to
increase by around 0.3x from its previous projection to 3.3x --
3.5x over the next 12-18 months.
In addition, in light of weak coal prices and slowing economic
growth, the downside risk to BUMA's adjusted leverage worsening
beyond Moody's current expectations is elevated, particularly if
coal miners cut back on production volumes this year.
The lost contract with Kideco further exacerbates customer
concentration and contract renewal risk for BUMA, which has another
large near-term contract expiry.
BUMA's contract with its largest customer Berau Coal (P.T.) at
Berau's Binungan coal mine, which Moody's estimates contributes to
around 20% of BUMA's annual overburden removal volumes, expires in
December 2020. BUMA's ratings will be downgraded if it fails to
renew this contract or renews the contract at substantially lower
rates or contracted volumes.
Furthermore, the loss of the Kideco contract increases BUMA's
customer concentration risk as it is now more dependent on its two
largest customers, Berau (Lati and Binungan mines) and Adaro
Indonesia (P.T.) (Ba1 stable), which contributed to 48% and 11% of
BUMA's consolidated revenues in 2019, respectively.
Also, while BUMA's mining operations have not yet been materially
impacted by the coronavirus outbreak, its earnings and cash flow
could experience considerable volatility in the event of temporary
closures at multiple mine sites.
Thus far, only one of BUMA's customers Bayan Resources Tbk (P.T.)
(Ba3 stable) announced on 27 March that operations at its Tabang
mines would be temporarily suspended through the end of April. BUMA
expects to make up for the lost volume later in the year.
Moody's expects BUMA's liquidity will remain weak, with BUMA's
internal cash sources being insufficient to meet its cash needs
over the next 12-18 months. The company has also fully drawn down
its bank loan facilities.
BUMA has some flexibility in terms of cutting back on capital
spending to preserve liquidity, or funding capital spending through
new finance leases. However, its limited liquidity buffer reduces
its ability to withstand a protracted downturn in coal demand and
prices. BUMA's rating will likely be downgraded if its liquidity
weakens further over the next three to six months.
The rating also considers BUMA's exposure to environmental, social
and governance risks as follows.
First, BUMA is exposed to elevated environmental risks associated
with the coal mining industry, including carbon transition risk as
countries seek to reduce their reliance on coal power. This risk is
somewhat mitigated by BUMA's customers supplying coal primarily to
Asia, a region with growing energy demand.
Second, BUMA is also exposed to social risks associated with
operating in the coal mining industry. To address these risks, BUMA
conducts initiatives under its occupational health and safety
systems, which pursue a zero-harm objective for workers. To
strengthen community relations, BUMA also implements programs to
improve education, living conditions and promote small local
businesses.
Third, with respect to governance, BUMA's ownership is
concentrated. The company is fully owned by PT Delta Dunia Makmur
Tbk (Delta), an investment holding company listed on the Indonesia
Stock Exchange. Delta, in turn, is 38% owned by an international
consortium through Northstar Tambang Persada Ltd, comprising
Northstar Equity Partners, TPG Capital, GIC Pte. Ltd. and China
Investment Corporation.
Although the consortium has remained invested in BUMA since 2009,
its longer-term strategy and investment horizon remain unclear.
Financial investors typically have an investment horizon of five to
10 years, suggesting that the shareholder group could seek an exit
over the life of BUMA's $350 million notes due in February 2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of BUMA's rating is unlikely over the next 12-18 months,
given the negative outlook.
The outlook could be revised to stable if BUMA (1) extends its
contract with Berau at the Binungan mine at substantially similar
terms; (2) achieves its expected overburden removal volumes while
maintaining its current profitability; and (3) improves its
liquidity such that its cash sources are sufficient to meet its
planned needs over the next 12-18 months.
Specific indicators that Moody's would consider for a change in
outlook to stable include adjusted debt/EBITDA staying below 3.25x
and retained cash flow/net debt staying above 25%, on a sustained
basis.
Moody's could downgrade the ratings if (1) BUMA experiences
operational disruptions or declining profitability; (2) its
liquidity weakens; (3) payments from Berau are delayed, such that
the average days for payment collection exceed 65 days; or (4) it
loses more contracts, or if its expiring contracts are not renewed
on similar or enhanced terms.
Specific financial metrics indicative of a downgrade include BUMA's
adjusted debt/EBITDA staying above 3.5x, retained cash flow/net
debt staying below 20%, or EBITA/interest expense staying below
2.0x, on a sustained basis.
In addition, negative ratings pressure would rise if there are
significant changes in Northstar Tambang Persada Ltd's shareholding
in PT Delta Dunia Makmur Tbk, or if BUMA's underlying financial
strategy were to change materially.
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
Established in 1998, Bukit Makmur Mandiri Utama (P.T.) (BUMA) is a
coal mining services contractor in Indonesia, providing open-cut
mining services to some of the country's largest coal producers.
BUMA is 100% owned (less one share) by Delta, an investment holding
company listed on the Indonesia Stock Exchange, which, in turn, is
38% owned by Northstar Tambang Persada Ltd. The remaining 62% stake
in Delta is held by public and institutional investors.
KAWASAN INDUSTRI: Fitch Alters Outlook on 'B' LT IDR to Negative
----------------------------------------------------------------
Fitch Ratings has revised the Outlook on Indonesia-based
homebuilder PT Kawasan Industri Jababeka Tbk's Long-Term Issuer
Default Ratings to Negative from Stable and affirmed the ratings at
'B'. At the same time, Fitch Ratings Indonesia has downgraded
KIJA's National Long-Term Rating to 'BBB+(idn)' from 'A-(idn)' and
revised the Outlook to Negative from Stable.
The Negative Outlook reflects the significant business
interruptions from the coronavirus pandemic and the resultant
weakness in property demand, which Fitch expects to extend well
into 2021. Fitch anticipates a significant decline in KIJA's
attributable presales to around IDR650 billion in 2020 (2019:
IDR1.3 trillion), lower than the IDR1 trillion threshold below
which Fitch may consider taking negative rating action. Fitch
forecasts KIJA's non-development interest cover ratio to decline
significantly below its historical level of 1x in 2020. Fitch
expects sales and interest cover to largely recover by 2021;
however, risks to the forecast are high, particularly in a
prolonged pandemic. The downgrade of KIJA's National Long-Term
Rating follows its assessment of the company's weakening financial
profile relative to its nationally rated peers.
'BBB' National Ratings denote a moderate default risk relative to
other issuers or obligations in the same country. However, changes
in circumstances or economic conditions are more likely to affect
the capacity for timely repayment than is the case for financial
commitments denoted by a higher-rated category.
KEY RATING DRIVERS
Lower Sales on Coronavirus: The Negative Outlook reflects Fitch's
assessment of the potential challenges KIJA may face in improving
its attributable presales in the next 12-18 months, because of slow
domestic property demand on account of the coronavirus pandemic.
Its rating case estimates that KIJA's attributable presales will
fall significantly below IDR1 trillion in 2020 - the level below
which Fitch may consider taking negative rating action. Fitch
forecasts a 70% yoy decline in 2Q20 sales amid the unprecedented
macroeconomic volatility and tight social-distancing measures,
which is exacerbated by the cyclical nature of KIJA's industrial
land sales. It also forecasts around a 50% decline in 3Q20 and
4Q20, and also some delays in presale collections across the same
period as some buyers may defer payments. A full sales recovery is
at least 12 months away, in Fitch's view.
Interest Cover to Weaken: Fitch also forecasts KIJA's
non-development interest coverage ratio to weaken in the near term,
which is captured in the Outlook revision. KIJA's non-development
income base comprises its infrastructure and leisure business
segments. The pandemic has slowed global trade, and Fitch expects
this to lead to lower quantities of container handling in KIJA's
Cikarang dry port facility and to affect the income from KIJA's
infrastructure business. Fitch also expects income from KIJA's
hospitality segment to decline by around 75% yoy in 2020 in light
of the government-imposed social-distancing measures, further
depressing the non-development income base. Fitch believes KIJA's
non-development interest coverage ratio will fall to 0.5x in 2020,
below the 1x level that the company has reported historically, and
will recover to around 1x only in 2022. An extended or deeper
impact from the pandemic will increasingly pressure KIJA's
non-development interest cover over the medium term and may lead to
a rating downgrade.
Challenging Macroeconomic Environment: Indonesia's economy is
suffering from the pandemic-related fallout due to its trade
linkages with China and exposure to commodity exports. Global risk
aversion has led to the Indonesian rupiah falling sharply to around
IDR15,000-16,000 per US dollar. Tightening financial conditions
stemming from currency depreciation will add another challenge to
Indonesian growth in 1H20 and will depress demand for home
purchases for most of the year.
Flexible Capex: KIJA's non-development capex, which Fitch forecasts
at around IDR100-150 billion in 2020-2023, will be limited to
regular maintenance of its power plant, dry port facilities and
other infrastructure for the next few years. This, coupled with the
discretionary nature of land acquisition spending, and also
construction costs that are partly contingent on certain sales
thresholds, allows the company to accumulate cash buffers and shore
up its liquidity profile.
Increasing Product Diversification: Fitch believes KIJA's increased
focus on residential and commercial products in Kota Jababeka and
Kawasan Industri Kendal, its second industrial estate, will provide
long-term diversification benefits. The residential and commercial
segments contributed an average of around 50% of total presales in
the past five years, compared with 14% in 2011. Similarly, presales
concentration in Cikarang has declined to an average of around 65%
in the past three years, from 100% in 2011. Fitch believes improved
diversification could lessen KIJA's exposure to the high
cyclicality of industrial land sales and provide traction for
growth.
Large, Low-Cost Land Bank: KIJA has a mature land bank in Kota
Jababeka of over 1,200 hectares, adequate for over 50 years of
development assuming sales of 10 hectares a year. Kota Jababeka is
the company's most mature development, with established
infrastructure and a captive industrial market. This land has
commanded premium pricing due to little competition, but faces
threats from cheaper pricing in neighbouring estates. Kawasan
Industri Kendal adds another 570 hectares to KIJA's land bank,
which provides enough resources for over 30 years of development,
assuming sales of 10 hectares a year.
DERIVATION SUMMARY
KIJA's rating is comparable with that of other Fitch-rated property
developers, such as PT Modernland Realty Tbk (B/Stable), PT Alam
Sutera Realty Tbk (ASRI, B-/Rating Watch Negative), PT Ciputra
Development Tbk (CTRA, BB-/Negative) and PT Lippo Karawaci TBK
(B-/Negative).
Fitch believes KIJA has a weaker development profile than
Modernland and ASRI. Demand risk is high in KIJA's Cikarang
township. The Kendal township is at an earlier stage of development
relative to the more mature and strategically located townships of
Modernland's Jakarta Garden City and ASRI's Alam Sutera. Fitch
believes this is compensated by KIJA's stronger and stable
non-development cash flow, which supports debt-servicing capacity
across economic cycles, and thus warrants the same rating with
Modernland. ASRI, on the other hand, is rated one-notch below KIJA
due to higher refinancing risks related to its maturing bond and
also its weaker liquidity position.
Fitch believes KIJA's business profile is weaker than that of CTRA.
The latter has significantly larger operating presales scale, more
geographically diversified projects with a presence in over 30
cities against KIJA's focus in its two townships, and lower
business cyclicality as CTRA focuses on residential properties
rather than industrial land sales. CTRA also has lower leverage,
which supports its multiple-notch rating difference compared with
KIJA.
Lippo's business profile is weaker than that of KIJA, underlined by
the high execution risks on Lippo's new projects and also its
significantly smaller property presales scale. A substantial
portion of KIJA's presales stem from industrial land, which can be
more volatile than residential property sales during downturns.
However, KIJA has gradually reduced its industrial sales mix in
favour of higher residential properties and commercial plots. In
contrast, Lippo's presales have dried up in the last few years
owing to weak operational execution, despite its focus on
residential property, and a sustained turnaround is yet to be seen.
KIJA is rated higher than Lippo to reflect the availability of
non-development cash flow, which partially covers its interest
payments in the medium term.
KIJA's rating on the National Rating scale is comparable with that
of PT Ciputra Residence (CTRR, A+(idn)/Negative), PT PP Properti
Tbk (PPRO, BBB-(idn)/Negative, Standalone Credit Profile:
bb+(idn)), Lippo (BB+(idn)/Negative) and PT Aneka Gas Industri Tbk
(A-(idn)/Stable). CTRR's rating is based on the consolidated
profile of its parent, CTRA. Fitch rates CTRR multiple notches
above KIJA because CTRR has larger property development scale,
broader geographical project diversification and lower leverage.
Fitch also believes that KIJA's higher exposure to industrial land
sales, which is more cyclical in nature relative to CTRR's
residential/commercial property sales, exacerbates the impact of
COVID-19 on KIJA's business profile, which is reflected in the
wider rating difference relative to CTRR.
KIJA has a wider profit margin, stronger non-development interest
cover and better operating cash-flow generation than PPRO. KIJA
also has a more established property-development record and
stronger cash-flow flexibility supported by a higher mix of land
and landed house sales, compared with PPRO which is mostly exposed
to high rise properties. These factors result in KIJA being rated
multiple notches above PPRO's Standalone Credit Profile. KIJA's
higher rating relative to Lippo's reflects the availability of
non-development cash flow to support its interest payments in the
medium term, and Lippo's weak operational execution and uncertainty
around its business turnaround.
Aneka Gas has a stronger market position compared to KIJA, evident
from its position as the largest industrial gas manufacturer in
Indonesia accounting for around a third of Indonesia's consumption.
Fitch believes this, combined with KIJA's relatively more cyclical
business given its exposure to property sales and also sale of
industrial land, warrant a one-notch rating difference between
their rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Attributable presales of around IDR650 billion in 2020
- Discretionary land acquisition capex of around IDR200-250
billion in 2020-2021
- Construction capex of around IDR500 billion in 2020-2021
- IDR125 billion-150 billion of non-development capex annually
for 2020-2021
KEY RECOVERY RATING ASSUMPTIONS
- The recovery analysis assumes KIJA would be liquidated in a
bankruptcy rather than be considered a going concern. Fitch has
also assumed a 10% administrative claim in the recovery analysis.
- Fitch assigned a liquidation value under a distressed scenario
of around IDR3.8 trillion as of end-September 2019. The estimate
reflects Fitch's assessment of the value of trade receivables under
a liquidation scenario, with a 75% advance rate, net investment
property with a 50% advance rate and land bank with a 100% advance
rate. Fitch believes the company's reported land bank value, which
is based on historical land costs, is conservative as it is at a
significant discount to current market value.
- The company's power-plant fixed assets, land bank in Kendal and
total assets of certain non-guarantor subsidiaries are excluded
from the liquidation-value estimate, as they are not part of KIJA's
US dollar-denominated senior unsecured bonds' guarantor group.
- Trade payables of IDR155 billion are assumed to be fully
covered by the cash balance.
- Around IDR220 billion of senior secured loans are senior to the
outstanding USD300 million senior unsecured bond in the waterfall.
These assumptions result in a recovery rate for the outstanding
senior unsecured bonds within the range for a 'RR2' Recovery
Rating. Nevertheless, Fitch rates the senior unsecured bonds at 'B'
with a Recovery Rating of 'RR4' because, under its Country-Specific
Treatment of Recovery Ratings Criteria, Indonesia falls into Group
D of creditor friendliness and instrument ratings of issuers with
assets in this group are subject to a soft cap at the issuer's
IDR.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
The following may lead to a revision of the Outlook to Stable:
- Improvement in annual attributable presales of more than IDR1
trillion by 2021
- Improvement in non-development EBITDA/gross interest cover
ratio to around or above 1.0x by 2021
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Inability to improve annual attributable presales to more than
IDR1 trillion by 2021
- Non-development EBITDA/gross interest cover ratio remaining
significantly below 1.0x by 2021
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: KIJA has limited debt maturity until its
USD300 million bond comes due in 2023. The company had a readily
available cash balance of around IDR750 billion as of September 30,
2019 and short-term debt maturities of around IDR120 billion, of
which approximately IDR65 billion was a revolving facility that is
typically rolled over in the normal course of business. Non
real-estate capex for the next few years will be limited to regular
power-plant maintenance and dry port infrastructure development.
This, coupled with the discretionary nature of land acquisitions
and some construction costs that are contingent on meeting certain
sales thresholds, allows KIJA to accumulate cash buffers and
strengthen its liquidity profile
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch has proportionately consolidated the key financials of a
number of KIJA's subsidiaries to reflect the significant minority
interests in the calculation of financial metrics. In addition,
KIJA reports additions of land for development as cash flow from
investments. Fitch has deducted this item from cash flow from
investments and added it to working capital as cash paid to
suppliers, as Fitch treats such payments as working capital
outflows.
PAN BROTHERS: Moody's Cuts CFR to B2, Outlook Negative
------------------------------------------------------
Moody's Investors Service has downgraded the corporate family
rating of Pan Brothers Tbk (P.T.) to B2 from B1.
At the same time, Moody's has downgraded to B2 from B1 the senior
unsecured rating on the 2022 notes issued by a wholly owned
subsidiary of Pan Brothers, PB International B.V., and guaranteed
by Pan Brothers and all its subsidiaries.
The outlook on the ratings remains negative.
RATINGS RATIONALE
"The downgrade reflects the heightened refinancing risk associated
with Pan Brothers' core $138.5 million revolving credit facility
due February 2021, and its assessment that the company's liquidity
headroom has narrowed materially," says Stephanie Cheong, a Moody's
Analyst.
"We expect Pan Brothers will have little liquidity buffer to
withstand any deterioration in earnings or unexpected stretches in
its working capital, and this presents a significant challenge even
under its new B2 rating," adds Cheong.
At September 30, 2019, Pan Brothers had a cash balance of $64
million and $36.5 million available under its core $138.5 million
revolving credit facility, which Moody's believes to be largely
drawn as of the end of March 2020. Pan Brothers' business is
seasonal in nature and working capital tends to peak in the first
half of the year, leading to negative cash from operations and
increased dependence on its revolving credit facility, which will
mature in less than a year.
While working capital typically unwinds in the second half of the
year, delays in orders or customer receivables, exacerbated by the
coronavirus outbreak, will stretch working capital and temper cash
flow generation. This in turn will likely require Pan Brothers to
fully draw down its revolving credit facility and eat into its cash
cushion, putting further stress on its liquidity.
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. Pan Brothers is
exposed to the retail industry which has been significantly
affected by the shock given its sensitivity to demand and
sentiment.
While Pan Brothers has longstanding relationships with major global
apparel retailers who have strong market positions and well
recognized brand names, it is uncertain how the pressure from a
severe drop in consumer spending will be distributed along the
value chain of retailers, distributors and suppliers like Pan
Brothers.
That said, Moody's base case assumes that Pan Brothers' revenue in
2020 will remain relatively flat, as the company's ability to pivot
its production to other revenue channels, such as the production of
masks and medical jumpsuits, should offset expected declines in its
fashion apparel sales. However, higher debt levels as a result of
increased working capital needs will weaken debt/EBITDA and
EBITA/interest expense to 5.1x and 1.9x respectively in 2020. The
negative outlook reflects the refinancing risk associated with Pan
Brothers' $138.5 million revolving credit facility as well as
Moody's view that the negative impact on revenues and working
capital may become more severe than it currently expects, because
of the unpredictable nature of the current operating environment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a ratings upgrade is unlikely over the
next 12-18 months. Nevertheless, the outlook could return to stable
if Pan Brothers (1) firmly addresses its challenged liquidity
position in the near term; and (2) maintains a stable operating
performance and working capital cycle.
Financial metrics that Moody's would consider for a change in the
outlook to stable include debt/EBITDA under 6.0x and EBITA/interest
expense above 1.5x on a sustained basis.
Moody's could further downgrade the ratings if Pan Brothers'
financial and liquidity profiles weaken beyond its current
expectations owing to: (1) an inability to refinance of its $138.5
million revolving credit facility by the end of June 2020; (2) a
higher than expected increase in working capital needs, further
pressuring its liquidity profile; or (3) weaker revenue growth and
deteriorating profitability, due to an industry downturn, intense
competition or regulatory changes.
Financial metrics that Moody's would consider for a change in the
outlook to stable include debt/EBITDA above 6.0x and EBITA/interest
expense below 1.5x on a sustained basis.
The principal methodology used in these ratings was Manufacturing
Methodology published in March 2020.
Pan Brothers Tbk (P.T.) is the largest listed manufacturer of
garment products in Indonesia, with a total production capacity of
90 million pieces of garments per year at September 30, 2019.
The company employs around 38,000 people across 12 production
facilities in west and central Java.
Pan Brothers generated approximately $656 million in revenue for
the 12 months ended September 30, 2019.
REJEKI ISMAN: Moody's Alters Outlook on Ba3 CFR to Negative
-----------------------------------------------------------
Moody's Investors Service has affirmed Sri Rejeki Isman Tbk (P.T.)
(Sritex)'s corporate family rating of Ba3.
In addition, Moody's has affirmed the Ba3 ratings on: (1) the $150
million senior unsecured notes due in 2024, issued by Golden Legacy
Pte. Ltd. and unconditionally and irrevocably guaranteed by Sritex
and its subsidiaries, and (2) the $225 million senior unsecured
notes due in 2025, issued by Sritex and unconditionally and
irrevocably guaranteed by all its operating subsidiaries.
Moody's has also revised the outlook on these ratings to negative
from stable.
RATINGS RATIONALE
"The negative outlook reflects its expectation that diminished
consumer spending on apparel and footwear globally as a result of
the coronavirus outbreak will reduce Sritex's earnings and increase
its working capital needs through 2020," says Stephanie Cheong, a
Moody's Analyst.
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, falling oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. Sritex is exposed
to the retail industry which has been significantly affected by the
shock given its sensitivity to demand and sentiment.
Moody's regards the coronavirus outbreak as a social risk under its
ESG framework, given the substantial implications for public health
and safety. Its action reflects the impact on Sritex of the breadth
and severity of the shock, and the broad deterioration in credit
quality it has triggered.
"How the pressure from the sharp contraction in discretionary
spending will be distributed along the value chain of retailers,
distributors and suppliers like Sritex remains uncertain. But in
its view, Sritex's products like yarn and greige, which make up
half of its total revenues, are particularly vulnerable as their
sales not under committed contracts and could fall away quickly in
case of prolonged lockdowns across the world," adds Cheong.
Sritex's garment sales should be largely stable as the company is
able to pivot its garment production to other revenue channels,
such as the production of masks and medical jumpsuits, which should
offset expected declines in its apparel sales.
Moody's base case assumes a 25% decline in EBITDA in 2020, leading
to Sritex's debt/EBITDA and EBITA/interest expenses weakening to
around 5.2x and 1.5x respectively in 2020. A moderate rebound in
consumer demand when the virus is contained should support
deleveraging to around 4.0x in 2021, a level more in line with its
Ba3 rating.
The negative outlook also reflects Moody's view that the negative
impact on revenues and working capital may become more severe than
currently expected, because of the unpredictable nature of the
current operating environment.
"Nevertheless, the rating affirmations reflect its expectation that
the company will have adequate liquidity to absorb negative
operating cash flow over the next two to three quarters," says
Cheong.
Sritex's large cash balance of $168 million at the end of 2019,
along with around $102 million of availability under committed
credit facilities, will be more than sufficient to cover its
upcoming $116 million of debt maturities in 2020. These include (1)
$30 million and $10 million of medium term notes due in November
and December 2020; (2) $8 million of scheduled debt repayments; and
(3) $68 million of short-term working capital loans which Sritex
plans to rollover.
Sritex's Ba3 rating continues to reflect its vertically integrated
operations and leading market position among Indonesian textile
manufacturers. The ratings also incorporate governance risk arising
from the company's concentrated ownership structure and related
party transactions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a ratings upgrade is unlikely over the
next 12-18 months. Nevertheless, the outlook could return to stable
if the operating environment improves significantly over the next
12 months and Sritex maintains healthy credit metrics, such that
its adjusted debt/EBITDA remains well below 4.5x and EBITA/interest
expense stays above 2.5x.
Moody's could downgrade the ratings if the negative impact on
revenues and working capital becomes more severe than currently
expected, such that its adjusted debt/EBITDA remains above 4.5x and
EBITA/interest expense stays below 2.5x for a sustained period of
time.
The principal methodology used in these ratings was Manufacturing
Methodology published in March 2020.
Sri Rejeki Isman Tbk (P.T.) (Sritex), based in Central Java,
Indonesia, is a vertically integrated manufacturer of yarn, greige
(raw fabric), finished fabric and apparel, including uniforms and
retail clothing. The company's operations are spread across 25
factories, consisting of nine spinning plants, three weaving
plants, five finishing plants and eight garment plants. Net revenue
generated by the company's four divisions amounted to around $1.2
billion in 2019.
Sritex is majority owned by the Lukminto family (60.11%). Iwan
Setiawan Lukminto, son of founder H.M Lukminto, has been the
company's president director since 2006. The family overseas the
day-to-day control of operations. The remaining 39.89% share of the
company is publicly traded on the Indonesian Stock Exchange.
=========
J A P A N
=========
ARCH FINANCE 2007-1: Moody's Cuts JPY12 Trillion Loan to B1
-----------------------------------------------------------
Moody's Japan K.K. has downgraded to B1 (sf) from Ba3 (sf) the
rating on Arch Finance Limited's repackaged deal.
The affected rating is as follows:
Arch Finance Limited Series 2007-1 Reverse Dual Currency Loan
JPY12,363,538,000 Series 2007-1, Downgraded to B1 (sf); previously
on Nov 7, 2016, Downgraded to Ba3 (sf)
RATINGS RATIONALE
Its rating action follows Moody's rating action on the collateral
asset on April 14, 2020. The rating on the collateral asset has
been downgraded.
The rating of the transaction mainly reflects the credit quality of
the collateral asset, the credit quality of the swap counterparty,
and the strength of the transaction structure.
If the ratings on the collateral asset or swap counterparty change,
the rating on the loan may also change.
The principal methodology used in this rating was "Moody's Approach
to Rating Repackaged Securities" (Japanese) published in March
2019.
Factors that would lead to an upgrade or downgrade of the rating:
Factors that could lead to a rating downgrade or upgrade are a
deterioration or improvement in the credit quality of the
collateral asset and the swap counterparty.
[*] JAPAN: Bailouts, Delistings Loom for Struggling Local Banks
---------------------------------------------------------------
Taiga Uranaka, Yuki Hagiwara, and Ayai Tomisawa at Bloomberg News
report that Japan's long-suffering regional banks face the biggest
threat to their survival since the 1990s post-bubble malaise as the
coronavirus hammers their few remaining profit drivers.
According to Bloomberg, analysts and investors are predicting some
local lenders will eventually be delisted or bailed out by the
government as bad loans climb and investment income evaporates in
the wake of the crisis.
"I am more concerned than ever for the outlook of many regional
banks," Bloomberg quotes Shannon McConaghy, London-based portfolio
manager at Horseman Capital Management Ltd., which manages about
$327 million, as saying. "I fully expect some regional banks will
become unviable and will be quasi-nationalized" by the deposit
insurance fund, he said.
Bloomberg says loan margins are poised to shrink from historical
lows and banks are being urged to relax terms for smaller
businesses as the government tries to cushion Japan's worst
recession in years with a flood of cheap funding. That won't stave
off a potential surge in bad loans, said McConaghy, who declined to
comment on his investment position but has made bearish calls on
regional banks in the past.
Bloomberg relates that the Bank of Japan this week identified
rising credit costs and losses on securities investment as key
risks to the financial system should the economic and market
turmoil persist. Both areas have been crucial to propping up
earnings at Japan's regional banks through years of rock-bottom
interest rates and a stagnating rural economy.
"If bad loans sharply increase, I expect the cases of public money
injections into banks will rise," with the rescues potentially
triggering industry consolidation, said Yoshinobu Yamada, a senior
adviser at PwC Advisory LLC, Bloomberg relays. "There is a concern
that the number of loss-making banks will increase."
A quarter of Japan's 105 local banks have been losing money in
their core lending and fee businesses for at least five years
running, Bloomberg discloses citing Financial Services Agency
figures to March 2019.
According to Bloomberg, banks worldwide are contending with the
prospect of loans souring as the deadly virus causes businesses to
shut down. The five biggest U.S. banks set aside roughly $25
billion to cover future losses from defaulted loans, earnings
reports showed this month.
"We need to look at how the impact of the coronavirus will spread
to regional financial institutions" and act quickly if needed to
ensure stability, Finance Minister Taro Aso said on April 22,
Bloomberg relays.
To be sure, bad loans at Japanese regional banks are nowhere near
the levels after the bursting of the bubble economy in the 1990s.
But according to Moody's Investors Service, they are vulnerable to
"even marginal deterioration of asset quality" because of weak loss
buffers and profitability, Bloomberg reports.
Bloomberg says Japanese authorities have been encouraging
consolidation within the industry for years, with limited success.
Now they are beginning to shift their focus away from shoring up
banks' profitability to ensuring they support companies in their
regions, said Shigeto Nagai, head of Japan economics at Oxford
Economics.
"In coming years, the authorities will likely examine ways to
delist weak-performing banks and convert them to some kind of
cooperative financial institutions," Nagai wrote in a report this
month. "This will release them from stockholders' dividend
pressures."
Still, bank leaders and policy makers maintain that the industry is
sound, Bloomberg states. Regional banks have built strong capital
and liquidity buffers since the global financial crisis, Japanese
Bankers Association Chairman Kanetsugu Mike said at an April 1
briefing. The financial system remains stable, the Bank of Japan
said in this week's report, Bloomberg reports.
The Topix Banks Index has declined 27% this year, more than the
benchmark Topix's 17% drop, Bloomberg discloses. The gauge of 82
lenders -- including Japan's three so-called megabanks as well as
regionals -- is trading at 0.32 times the book value of their
assets, compared with 0.77 among U.S. peers on the KBW Bank Index.
According to Bloomberg, regional lenders are also navigating the
impact of rocky financial markets on their JPY80 trillion ($743
billion) investment portfolios that have over the years shifted
away from low-yielding Japanese government bonds. Apart from U.S.
Treasuries, they also hold more risky equities, high-yield bonds
and even packaged corporate debt known as collateralized loan
obligations, which are all now showing signs of stress.
Local lenders' holdings of investment trusts -- including assets
ranging from bonds and stocks to real estate -- could incur large
losses if the global market turmoil persists, the Bank of Japan
said, adds Bloomberg.
=========
M A C A U
=========
MELCO RESORTS: S&P Retains 'BB' LT ICR on CreditWatch Negative
--------------------------------------------------------------
S&P Global Ratings, on April 20, 2020, kept all of its ratings on
Macau-based Melco Resorts & Entertainment Ltd.'s (MLCO) two major
operating subsidiaries in Macau, Melco Resorts (Macau) Ltd. (MRM)
and Studio City Co. Ltd., on CreditWatch with negative
implications. The 'BB' long-term issuer credit rating on MRM and
'BB-' long-term issuer credit rating on Studio City were first
placed on CreditWatch on Feb. 6, 2020.
The ratings on MRM and Studio City remain on CreditWatch with
negative implications given COVID-19-related travel restrictions
continue to significantly affect MLCO group. The group's EBITDA and
operating cash flow will severely decline and its debt leverage
will rise substantially in 2020, in light of an unprecedented
decline in Macau's visitor arrivals. At the same time, S&P believes
a recovery is still possible if travel restrictions are gradually
lifted starting in June.
S&P said, "We take a consolidated view of MLCO group when assessing
the credit profile of MRM, because MRM is the core cash flow
generating subsidiary of the group. Our rating action on Studio
City is in tandem with our action on MRM, because Studio City
benefits from three notches of rating uplift due to potential
financial support from MLCO group. We do not expect a material
change of Studio City's stand-alone credit profile. We believe
Studio City's liquidity will remain adequate over the next 12
months, despite a higher debt leverage during the period."
The Macau gaming industry is facing an unprecedented decline in
visitors and gaming revenue due to travel restrictions, contagion
fears, and weak consumer sentiment. S&P said, "Our base case
assumes Macau's gross gaming revenue will decline by 35%-45% in
2020, and gradually recover in 2021. Gaming revenue declined by 80%
year on year in March 2020, after falling 88% in February, despite
reopening of casinos on Feb. 20, 2020. We expect the drastic
declines in visitors to Macau and gaming revenue to continue into
the second quarter, given the new travel restrictions affecting
Macau since mid to late March." Macau banned entry for
non-residents who had traveled outside of China during the last 14
days. Mainland China and Hong Kong also mandated people returning
from Macau to undergo a 14-day quarantine.
MLCO's operating profit and cash flow will severely worsen in 2020,
given the company generated about 85% of its property-level EBITDA
in Macau. MLCO's casinos in Manila (15% of property-level EBITDA)
will be hit hard in 2020, given the temporary suspension of
operations starting March 15 and the community quarantine. While
MLCO largest operating expense (gaming taxes) is variable and will
fall in line with gaming revenue, a sizable portion of its expense
base is labor. S&P views labor costs as a largely fixed expense, at
least in most of 2020. S&P expects the group's EBITDA to decrease
by 50%-60% in 2020, steeper than its revenue drop of 35%-45% during
the year.
S&P said, "COVID-19 comes at a time when we expect MLCO's capital
expenditure (capex) on its new casino projects to spike. Piling
for Studio City Phase II commenced in January 2020. The
construction of its new casino in Cyprus, City of Dreams
Mediterranean (CoD Mediterranean), is also ongoing. These
constructions are subject to suspension, as required by the
governments, due to the COVID-19 outbreak. Our base case assumes
that MLCO's capex will increase to US$600 million-US$700 million in
2020 and US$800 million-US$900 million in 2021, from US$450 million
in 2019, mainly on Studio City Phase II and CoD Mediterranean. As a
result, we estimate MLCO's debt-to-EBITDA ratio to surge to
6.5x-7.0x in 2020, from 2.5x in 2019. Nevertheless, the
construction progress could be delayed longer than we expected due
to COVID-19 and the actual cash outflows on those projects could
partly slip into 2021 or 2022."
A return to normalcy is likely in 2021. Our base case assumes
that MLCO's operations will gradually recover starting late 2020
and the company's debt-to-EBITDA ratio will materially improve to
3.3x-3.7x in 2021 and 2.7x-3.2x in 2022, from 6.5x-7.0x in 2020,
assuming the COVID-19 pandemic is contained in 2020. Nevertheless,
the trajectory of the rebound will depend on the duration of travel
restrictions (especially visa policies) and any secondary impact
from a global recession on purchasing power and sentiment of casino
players.
MLCO has some flexibility to manage its debt leverage, if it
chooses to. The company owns 9.99% of Crown Resorts Ltd. The
valuation of the shares was about US$350 million as of April 7,
2020. Although MLCO does not have an imminent plan to sell the
shares, it views this investment as non-core asset that could be a
source of liquidity, if needed. Our current base case does not
assume a disposal of Crown's shares by MLCO, given the uncertain
timing and valuation of the potential transaction. In addition, we
believe the company could also reevaluate its dividend policies or
further delay part of its capital investment, if needed.
We aim to resolve the CreditWatch status when we have more
information on the extent and impact of COVID-19.If the pandemic is
not contained and if we believe travel restrictions will extend
well into the third quarter, we may lower the ratings. That will
also likely mean MLCO won't be able to reduce its debt leverage to
3.5x by 2021.
=================
S I N G A P O R E
=================
HIN LEONG: Hin Leong Seeks to Appoint PwC as Judicial Managers
--------------------------------------------------------------
The Financial Times reports that Hin Leong is seeking to appoint
PwC as an independent manager to run the business as it pursues a
debt restructuring of almost $4 billion.
The company will withdraw the bankruptcy protection filing it
submitted last week and instead ask Singapore's High Court to
appoint PwC as a third party to run the company, a process known as
judicial management, the FT relates citing people familiar with the
situation. A virtual court hearing will be held in the next few
days.
Under judicial management, PwC, which is already advising the
trader on negotiations with lenders, would run the company's
property, business and affairs as it tries to restructure a debt
load of $3.85 billion, the FT says.
HSBC is the bank with the biggest exposure to Hin Leong at $600
million, followed by ABN Amro at $300 million, while Societe
Generale has lent the company $240 million. Three Singaporean banks
- DBS Group, OCBC Bank and United Overseas Bank - have exposure of
$680 million, the report discloses.
The FT says the switch in legal strategy follows a tumultuous week
for one of Asia's largest shipping fuel traders. According to the
FT, Singapore's police has launched a probe into Hin Leong after
billionaire founder Lim Oon Kuin said he had directed the company's
finance department not to disclose $800 million of losses sustained
in futures markets. In court filings, he also revealed that oil
pledged as collateral for loans had been sold to raise cash.
The collapse of Hin Leong has sent shockwaves through the commodity
trading industry, the FT notes.
The FT relates that Hin Leong's lenders had been expected to push
for judicial management over bankruptcy protection to avoid having
members of the founding family manage the business during a debt
restructuring, according to people familiar with the situation.
Evan Lim, Mr. Lim's son, is a Hin Leong director and runs Ocean
Tankers, the family's shipping business that has also filed for
bankruptcy protection, the FT adds. Its application will not be
withdrawn, according to a person familiar with the matter.
Under judicial management, which typically last about six months,
Hin Leong would be protected from any legal action while it seeks
to put its finances in order, the FT says. After 60 days, the
interim manager has to put a debt restructuring proposal to
creditors for approval.
However, the move to appoint PwC could yet be opposed by lenders
seeking a more independent third party, the report notes.
"Are PwC conflicted because they were originally appointed by the
family?" asked one banker.
PwC was hired by Hin Leong this month to assist in its debt
restructuring, the FT says.
Five years ago, the firm was involved with Noble Group, the
Singapore-listed commodity trader that almost collapsed in an
accounting and debt scandal before pushing through a dramatic
financial restructuring, the FT recalls. PwC was hired by Noble to
review how the company recorded profits on long-term supply
agreements and concluded they were consistent with industry
practice, the report adds.
About Hin Leong
Hin Leong Trading (Pte.) Ltd. provides petroleum products and
transportation services. The Company offers oil, lubricants,
grease, and diesel products, as well grants storage, terminalling,
trucking, and marine logistics services. Hin Leong Trading serves
customers globally.
Hin Leong Trading and shipping unit Ocean Tankers (Pte.) Ltd. filed
for court protection from creditors on April 17, 2020, as the
former struggles to repay debts of almost US$4 billion.
Hin Leong posted a positive equity of US$4.56 billion and net
profit of US$78 million in the period ended October 31, according
to the people, who asked not to be identified as the matter is
sensitive, according to Bloomberg News.
But Hin Leong told its creditors this month that total liabilities
reached US$4.05 billion as of early April, while assets were just
US$714 million, leaving a hole of at least US$3.34 billion,
according to screenshots of the presentation to a group of bankers
seen by Bloomberg News.
The balance sheet of the company showed no equity at all as of
April 9, 2020, and warned that "figures obtained from the company
are subject to verification," Bloomberg News added.
HIN LEONG: Sembcorp Subsidiary Terminates Gasoil Supply Deal
------------------------------------------------------------
Channel News Asia reports that Sembcorp Industries said on April 22
that its subsidiary Sembcorp Cogen has terminated a gasoil supply
and storage agreement with troubled oil trader Hin Leong Trading
"to protect its interests".
Sembcorp Cogen had inked the deal with Hin Leong in 2009 to
purchase gasoil reserves required under its electricity generation
licence from the Energy Market Authority (EMA). Hin Leong also
provides storage and management services for the gasoil reserves on
behalf of Sembcorp Cogen, the report says.
According to CNA, Sembcorp Industries said in a filing that the
carrying book value of the gasoil reserves stored with Hin Leong
was SGD94 million as of Dec 31, 2019.
EMA requires Sembcorp Cogen to have enough gasoil reserves for at
least 60 days of operations. At least 30 days of the operational
reserves must be located at Sembcorp Cogen's generating premises or
on a site approved by the EMA, the filing added.
One of Asia's largest independent oil trader, Hin Leong, which
means "prosperity" in Chinese, is now struggling to repay debts of
US$3.85 billion (SGD5.49 billion) amid an oil price crash.
The firm filed for bankruptcy protection last week amid revelations
that its billionaire founder Lim Oon Kuin had directed the company
to hide nearly US$800 million in losses from speculating oil
futures over the years.
The Singapore police confirmed on Tuesday that investigations are
ongoing, while the Accounting and Corporate Regulatory Authority
said it is monitoring the case and "will assess if further action
is warranted".
The Enterprise Singapore, the Maritime and Port Authority of
Singapore and the Monetary Authority of Singapore also said they
are "closely monitoring" developments relating to the debt-laden
oil trader and the broader oil trading and bunkering sectors.
Given these recent news reports and Hin Leong's filing for a debt
moratorium, Sembcorp Industries said in the bourse filing that
"Sembcorp Cogen has taken steps to protect its interests over the
gasoil reserves" and terminated the agreement, according to the
report.
It added that it has notified EMA of the situation, the report
says.
About Hin Leong
Hin Leong Trading (Pte.) Ltd. provides petroleum products and
transportation services. The Company offers oil, lubricants,
grease, and diesel products, as well grants storage, terminalling,
trucking, and marine logistics services. Hin Leong Trading serves
customers globally.
Hin Leong Trading and shipping unit Ocean Tankers (Pte.) Ltd. filed
for court protection from creditors on April 17, 2020, as the
former struggles to repay debts of almost US$4 billion.
Hin Leong posted a positive equity of US$4.56 billion and net
profit of US$78 million in the period ended October 31, according
to the people, who asked not to be identified as the matter is
sensitive, according to Bloomberg News.
But Hin Leong told its creditors this month that total liabilities
reached US$4.05 billion as of early April, while assets were just
US$714 million, leaving a hole of at least US$3.34 billion,
according to screenshots of the presentation to a group of bankers
seen by Bloomberg News.
The balance sheet of the company showed no equity at all as of
April 9, 2020, and warned that "figures obtained from the company
are subject to verification," Bloomberg News added.
=================
S R I L A N K A
=================
ABANS FINANCE: Fitch Alters Outlook on 'BB+(lka)' Rating to Neg.
----------------------------------------------------------------
Fitch Ratings Lanka has revised the Outlook on Abans Finance PLC to
Negative from Stable and affirmed its National Long-Term Rating at
'BB+(lka)'.
KEY RATING DRIVERS
The rating action follows the revision of the Outlook on the parent
Abans PLC's 'BBB+(lka)' rating to Negative from Stable on April 10,
2020.
Abans Finance's rating reflects Fitch's view that support would be
forthcoming from the parent, if needed. Its expectation stems from
Abans being the largest shareholder in Abans Finance, the parent's
involvement in strategic decisions through board representation and
a common brand name.
Abans Finance is rated three notches below its parent because of
its limited contribution to the group's core businesses. The
company financed less than 1% of Abans' consumer durables revenue
in the financial year ending March 2019 (FY19). It mainly provides
vehicle financing, with 47% of its lending channeled through the
sale of two-wheelers by Abans Auto (Pvt) Limited, a company owned
by Abans' shareholders but positioned outside of the Abans group.
Abans Finance only contributed 4% of group operating profit in
9MFY20. Its assessment of Abans Finance's limited importance also
incorporates Abans' decreasing shareholding in its subsidiary,
which has fallen to 50%, from 89% in FY16, due to capital
infusions, mostly via its private-equity investor.
Abans Finance's intrinsic financial strength is significantly
weaker than its support-driven rating due to its small franchise,
limited operating history and high-risk appetite. Its reported
regulatory gross non-performing loan ratio over six months had
further deteriorated to 23.1% at end-September 2019 (FY19: 18.0%),
significantly above the industry average of 9.7%.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
Fitch believes an upgrade would be most likely to result from an
upgrade of Abans' rating or a significant increase in Abans
Finance's strategic importance to its parent. However, Fitch did
not expect such a change in the near term.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
Any reduction in perceived support from Abans through, for
instance, further dilution in the parent's shareholding to meet
higher regulatory capital requirements or an increase in the scale
of the business relative to the parent through organic or inorganic
growth could be negative for its rating. The removal of parental
support could result in a downgrade of the rating to Abans
Finance's Standalone Credit Profile, which is multiple notches
below its current rating.
A downgrade of Abans' National Long-Term Rating could also trigger
a rating downgrade on Abans Finance.
Issuer Disclosure on Regulatory Action
Abans Finance is in compliance with the minimum core capital set
out in the Finance Business Act, following the decision by Central
Bank of Sri Lanka (CBSL) to defer the requirement of LKR2 billion
until end-2020. As such, CBSL approved on April 10, 2020 for Abans
Finance to freely canvas deposits up to LKR6 billion and upon
reaching that limit may apply to CBSL to canvas additional
deposits.
The 'Issuer Disclosure on Regulatory Action' heading was provided
by the issuer and is included pursuant to applicable regulatory
requirements. Fitch Ratings Lanka is not responsible for the
contents of such information.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The rating of Abans Finance is driven by support from the parent,
Abans.
CEYLON BANK: Moody's Reviews B2 Deposit Rating for Downgrade
------------------------------------------------------------
Moody's Investors Service has placed the B2 long-term local
currency deposit and foreign currency issuer ratings of Bank of
Ceylon, Hatton National Bank Ltd. and Sampath Bank PLC on review
for downgrade.
At the same time, Moody's has downgraded the Baseline Credit
Assessment of BOC to b3 from b2 and placed it on review for further
downgrade. Moody's has also placed the b2 BCAs of HNB and Sampath
on review for downgrade.
The outlooks have been changed to rating under review from stable.
The rating actions follow Moody's placement of Sri Lanka's B2
sovereign rating on review for downgrade.
RATINGS RATIONALE
The decision to place the banks' assessments and ratings on review
for downgrade reflects Moody's placement of Sri Lanka's B2
sovereign rating on review for downgrade. Moody's believes that
there is a high level of dependency between the creditworthiness of
Sri Lankan banks and that of the sovereign, because the banking
operations are largely domestic and the banks hold significant
amounts of sovereign debt. In addition, the sovereign's credit
strength is a key input to Moody's assessment of the government's
ability to support the banks in times of need.
The rapid and widening spread of the coronavirus outbreak,
deteriorating global economic outlook, volatile oil prices, and
asset price declines are creating a severe and extensive credit
shock across many sectors, regions and markets. The Sri Lankan
banking system has been one of the sectors affected by the shock,
given Sri Lanka's weak economy and heavy reliance on external
borrowings. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. Its action also incorporates the
negative impact on BOC, HNB and Sampath of the breadth and severity
of the shock, and the likely deterioration in the banks' asset
quality and in the government's ability to support these banks in
times of need.
Its action also incorporates the negative impact on BOC, HNB and
Sampath of the breadth and severity of the shock, and the likely
deterioration in the banks' asset quality and in the government's
ability to support these banks in times of need.
Sri Lanka's already weak economy will take a further hit from the
widespread disruption to tourism, export-oriented sectors and
domestic activities because of the coronavirus pandemic. The
deterioration in macroeconomic conditions also has the potential to
substantially weaken the banks' asset quality and profitability. At
the same time, the risk-off sentiment among global investors could
also hinder the government's access to external borrowings,
exacerbating the deterioration in the government's fiscal position
and ability to support the banks in times of need. The degree of
negative impact will depend on the length of the disruption, which
is uncertain at this point.
The downgrade of BOC's BCA mainly reflects the deterioration in the
bank's asset quality, as well as the bank's low capitalization when
compared to its Sri Lankan peers. BOC's problem loan ratio, based
on the proportion of stage 3 loans under the equivalent of IFRS
(International Financial Accounting Standard) 9, rose to more than
10% as of December 31, 2019 from 9.2% a year ago amid subdued
tourism activity following the Easter Sunday 2019 terrorist attack.
The bank's Common Equity Tier 1 ratio of 11.4% as of December 31,
2019 is also modest relative to the rated peer average of 13.4%,
reflecting a weak loss buffer amid a deteriorating operating
environment. Despite its weakening solvency, Moody's expects the
bank's funding and liquidity will remain stable over the next 12-18
months.
Moody's incorporates a very high probability of government support
in the ratings of BOC, reflecting the bank's systemic importance as
the largest bank in Sri Lanka and the government's full ownership
of the bank. As a result, BOC's B2 long-term local currency deposit
and foreign currency issuer ratings are one notch higher than the
bank's BCA.
While Moody's incorporates a high probability of government support
in the long-term local currency deposit and foreign currency issuer
ratings of HNB and Sampath, in line with the banks' sizable market
shares in terms of deposits, the ratings do not benefit from any
uplift because the banks' BCAs are already at the same level as the
sovereign rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the review for downgrade, the banks' BCAs and long-term
ratings are unlikely to be upgraded during the review period.
Nevertheless, Moody's could confirm the ratings with either a
stable or negative outlook if the coronavirus situation eases and
the impact on Sri Lanka's economy and the government's ability to
refinance its debts is not as severe as Moody's currently
anticipates.
A downgrade of the sovereign rating could lead to a downgrade of
the banks' BCA and long-term ratings. Moody's could also downgrade
the banks' BCAs if there is a material deterioration in asset
quality. A significant decline in capitalization will also exert
downward pressure on the banks' BCAs.
The principal methodology used in these ratings was Banks
Methodology published in November 2019.
Bank of Ceylon, headquartered in Colombo, reported total assets of
LKR2,462 billion at December 31, 2019.
Hatton National Bank Ltd., headquartered in Colombo, reported total
assets of LKR1,196 billion at December 31, 2019.
Sampath Bank PLC, headquartered in Colombo, reported total assets
of LKR999 billion at December 31, 2019.
Issuer: Bank of Ceylon
Adjusted Baseline Credit Assessment, Downgraded to b3 from b2;
Placed Under Review for further Downgrade
Baseline Credit Assessment, Downgraded to b3 from b2; Placed Under
Review for further Downgrade
Long-term Counterparty Risk Assessment, Downgraded to B2(cr) from
B1(cr); Placed Under Review for further Downgrade
Short-term Counterparty Risk Assessment, Affirmed NP(cr)
Long-term Counterparty Risk Rating (Foreign and Local Currency),
Downgraded to B2 from B1; Placed Under Review for further
Downgrade
Short-term Counterparty Risk Rating (Foreign and Local Currency),
Affirmed NP
Long-term Issuer Rating (Foreign Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Foreign Currency), Placed on Review for
Downgrade, currently B3, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Local Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Short-term Deposit Rating (Foreign and Local Currency), Affirmed
NP
Outlook, Changed To Rating Under Review From Stable
Issuer: Hatton National Bank Ltd.
Adjusted Baseline Credit Assessment, Placed on Review for
Downgrade, currently b2
Baseline Credit Assessment, Placed on Review for Downgrade,
currently b2
Long-term Counterparty Risk Assessment, Placed on Review for
Downgrade, currently B1(cr)
Short-term Counterparty Risk Assessment, Affirmed NP(cr)
Long-term Counterparty Risk Rating (Foreign and Currency), Placed
on Review for Downgrade, currently B1
Short-term Counterparty Risk Rating (Foreign and Local Currency),
Affirmed NP
Long-term Issuer Rating (Foreign Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Foreign Currency), Placed on Review for
Downgrade, currently B3, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Local Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Short-term Deposit Rating (Foreign and Local Currency), Affirmed
NP
Outlook, Changed To Rating Under Review From Stable
Issuer: Sampath Bank PLC
Adjusted Baseline Credit Assessment, Placed on Review for
Downgrade, currently b2
Baseline Credit Assessment, Placed on Review for Downgrade,
currently b2
Long-term Counterparty Risk Assessment, Placed on Review for
Downgrade, currently B1(cr)
Short-term Counterparty Risk Assessment, Affirmed NP(cr)
Long-term Counterparty Risk Rating (Foreign and Local Currency),
Placed on Review for Downgrade, currently B1
Short-term Counterparty Risk Rating (Foreign and Local Currency),
Affirmed NP
Long-term Issuer Rating (Foreign Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Foreign Currency), Placed on Review for
Downgrade, currently B3, Outlook Changed To Rating Under Review
From Stable
Long-term Deposit Rating (Local Currency), Placed on Review for
Downgrade, currently B2, Outlook Changed To Rating Under Review
From Stable
Short-term Deposit Rating (Foreign and Local Currency), Affirmed
NP
Outlook, Changed To Rating Under Review From Stable
SIERRA CABLES: Fitch Cuts LT IDR to BB(lka), On Watch Negative
--------------------------------------------------------------
Fitch Ratings has downgraded Sri Lanka-based cable manufacturer
Sierra Cables PLC's National Long-Term Rating to 'BB(lka)' from
'BB+(lka)' and placed the ratings on Rating Watch Negative.
The downgrade reflects Fitch's assessment that Sierra's cash flow
will weaken materially due to the business interruption in the
domestic construction industry caused by the coronavirus pandemic.
Fitch does not expect operating conditions to normalise to
pre-pandemic levels for at least 12-18 months, as state and
private-sector funded infrastructure projects will be deferred and
liquidity pressure will increase among construction companies which
are Sierra's debtors. Fitch forecasts Sierra's leverage to increase
above 4.5x in the financial year ending March 2021 (FY21), from its
estimated 2.7x in FY20. This is based on its forecast that EBITDA
could fall by 50% yoy to LKR300 million and revenue could fall by
38% yoy to LKR3.6 billion.
The RWN reflects the risks that Sierra's liquidity could weaken
significantly in the near term, with around LKR150 million of cash
at end-2019 (3QFY20) to meet debt maturities of around LKR1 billion
in the next 12 months. Most of the maturities are working capital
loans from banks, which Fitch believes will be rolled over given
the temporary nature of the current slowdown. However, working
capital could be pressured further in a prolonged downturn and may
lead to difficulty in obtaining bank funding to make up for
cash-flow shortfalls. The company says banks have agreed to extend
the principal due on term loans, amounting to around LKR250 million
in 2HFY20, if interest is being serviced, which supports near-term
liquidity. Another negative rating action may be warranted if
Sierra's liquidity weakens further.
KEY RATING DRIVERS
Pandemic-Related Economic Disruption: Social-distancing measures
have resulted in significant disruption to construction-sector cash
flows, and Fitch does not expect the current lockdown to be
completely lifted at least until May. Even once the lockdown is
eased, Fitch expects the economic impact from the pandemic to
affect both domestic spending and investments, which drive
construction activity. Existing projects will likely face cash-flow
constraints as financial institutions may adopt a cautious approach
in increasing exposure to this highly cyclical sector.
New public infrastructure projects are likely to be deferred at
least in the next six to 12 months, while Fitch expects payments
for ongoing projects to be delayed significantly. Fitch forecasts
Sri Lanka's GDP growth to remain muted at around 2% for 2020 and
the debt/GDP ratio to reach 90% (2019: 85%), as the government
supplements its fiscal deficits with additional borrowings. A
lockdown extended beyond May in a bid to contain domestic
coronavirus infections could lead to further weakness in the
economy.
Revenue to Decline: Fitch expects Sierra's projects segment to
experience revenue declines of around 40% yoy to LKR1.2 billion, on
delays in ongoing construction projects and deferment of new
construction. The impact on revenue from public tenders for
infrastructure may be smaller and Fitch has factored in a 25% yoy
cut to LKR1.2 billion, as most projects are funded via bilateral
agencies. However, the government is likely to defer new
construction in the near term. Fitch also forecasts the
retail-oriented dealer market to decline by 38% yoy to LKR780
million.
Fitch estimates Sierra's FY20 revenue was more than LKR5.5 billion
due to strong growth in private sector projects. Sierra expects
this momentum to continue well into FY21, resulting in revenue of
around LKR4 billion-5 billion. However, the assumptions in its
rating case forecast incorporate significant execution risks to the
company's targets amid a stressed economic environment in the next
12-18 months.
Tight Cash Flow, Interest Coverage: Fitch expects Sierra to
generate LKR3.6 billion in revenue and LKR300 million in EBITDA for
FY21, but the company is likely to see a deterioration of its
working-capital cycle. Sierra's receivable collection cycle for the
tenders and projects segment is likely to increase owing to a
contraction in cash flow, as both the private and public sectors
are likely to defer payments as a result of their strong bargaining
power. Sierra generates around 40% of its revenue from
government-related projects - with the Ceylon Electricity Board
(AA+(lka)/Negative) an essential client.
Fitch expects Sierra's funds from operations interest cover to fall
to 1.9x by FYE21, before recovering to 2.1 by FYE22. Sierra has
deferred its discretionary capex plans and will only incur a
minimum maintenance component for the medium term, and has
flexibility to defer dividends to conserve cash.
Constrained Profitability: Fitch expects Sierra's EBITDA margin to
decline by 100bp to 8.5% in FY21, from its previous base-case
assumption of 9.5%, due to a limited ability to cut costs in line
with falling revenue. Sierra's production costs will rise given
most raw materials are imported amid a 10% weakening in the Sri
Lankan rupee against the US dollar in the year to date. However,
the currency depreciation is counterbalanced by Fitch's expectation
of lower prices for key commodity inputs, such as copper and
aluminium, which are expected to be around 4% lower for FY21.
Sierra can also pass on some of the cost increases on existing
contracts as they are drawn up on a cost-plus basis.
Sierra Industries to Weaken: Fitch believes it would be challenging
for Sierra's PVC business, Sierra Industries, to replicate the
revenue highs of FY19 and FY20 from large project wins. The
National Water Supply and Drainage Board (NWSDB) - Sierra
Industries' main client - is likely to delay its tender process for
the year and defer any new projects undertaken in light of the
pandemic-related stress on public finances. Fitch believes the
sector has strong growth potential upon normalisation of
operations, with only 50% of the country's population having access
to piped water. The NWSDB aims to increase the coverage with the
help of both public and private-sector support, which is a
long-term positive.
Slow Progress in Kenya: Fitch expects Sierra's subsidiary, Sierra
Cables East Africa (SCEA), to remain unprofitable over FY20-FY23 as
the company has not secured a major contract since setting up
operations in 2017. As such, capacity utilisation is low and the
plant will remain unprofitable until SCEA wins a substantial
contract. The long-term opportunity in the Kenyan market remains
strong given the country's low electrification, the inability of
local companies to meet rising demand and the availability of
funding by foreign donors in the power sector. However, Sierra has
yet to show it is able to tap the potential of the market.
DERIVATION SUMMARY
Sierra is a copper and aluminium cable manufacturer with a modest
product portfolio and local market share. Its smaller operating
scale and significant exposure to cyclical end-markets is reflected
in a rating that is multiple notches lower than that of rated
peers, such as DSI Samson Group (Private) Limited
(BBB(lka)Positive) and consumer-durable retailers Singer (Sri
Lanka) PLC (BBB+(lka)/Negative) and Abans PLC (BBB+(lka)/Negative).
Sierra's expansion into international markets will keep its
business risk high in the medium-term compared with peers.
Sierra is rated on a standalone basis, reflecting Fitch's
assessment of weak linkages between Sierra and its weaker parent,
Sierra Holdings Private Limited, as the parent does not have
majority board representation and has a low dependency on Sierra's
cash flow to service its own obligations.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
- Pandemic-related impact to be intense in most of 1QFY21, and
ease gradually between 2QFY21-1QFY22.
- Revenue to decline by 38% in FY21 and recover by around 18% to
LKR4.2 billion in FY22, as the construction sector begins its
recovery.
- EBITDA margin to contract by 100bp to 8.5% (previous base case:
9.5%) in FY21 amid lower sale volumes and currency pressures. An
average EBITDA margin of 9% for FY22-FY23.
- Working capital outflow of around LKR100 million in FY21,
despite falling revenue, due to a longer working-capital cycle
driven by increasing debtor days.
- Capex to hover at around LKR40 million in FY21, related mainly
to maintenance, with an average of around LKR100 million a year
over FY22-FY23.
- No dividends in FY21, with around LKR25 million a year over
FY22-FY23.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Fitch may resolve the RWN and assign a Stable Outlook if the
operating environment stabilises such that Sierra's FFO net
leverage is on track to fall below 4.0x by FY22 (FY20: 2.7x, FY21:
4.7x)
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Deterioration in the FFO interest cover to below 1.5x (FY20:
3.0x, FY21: 1.9x)
- Significant deterioration in liquidity
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Tight Liquidity: Sierra had LKR157million of unrestricted cash as
of end-December 2019 to meet around LKR1billion of repayments
falling due in the 12 months. Around LKR760 million consists of
working capital lines, which Fitch expects lenders to roll over
given the temporary nature of the disruption. Around LKR250 million
is comprised of maturities of long-term loans, which have been
extended by around three months subject to timely servicing of
interest. Sierra has satisfactory bank access in light of its
record of timely repayments. Sierra has LKR73 million in
uncommitted unused credit lines, and obtained an additional LKR100
million uncommitted facility in March, which could further support
near-term liquidity visibility.
===============
T H A I L A N D
===============
THAI AIRWAYS: On Financial Brink as Government Debates Rescue
-------------------------------------------------------------
Masayuki Yuda at Nikkei Asian Review reports that Thai Airways
International, a listed state-owned enterprise, is dangerously
close to becoming the world's first national flag carrier to go
bust amid the coronavirus pandemic, with only days left to maneuver
out of its latest financial straits.
Down to its last THB10 billion (US$307 million), according to local
reports, which is enough to pay its employees for one month, the
airline is in talks with the Thai government regarding a bailout,
the Nikkei says.
To tide itself over during the emergency, the carrier has requested
that the government approve a 70 billion-baht bridge loan, with the
Finance Ministry as a guarantor, ministry sources told the Nikkei
Asian Review.
"Finally, it will be the Ministry of Finance's burden to seek a way
to bail out Thai Airways," the report quotes an analyst at Asia
Plus Securities who asked not to be named as saying. Thai Airways
made the request based on the hypothesis that the pandemic will be
contained by October, the report notes.
"I still would like to see Thai Airways as the national flag
carrier," Deputy Prime Minister Somkid Jatusripitak said, "because
that is the way things have been for a long time," the Nikkei
relays.
The Nikkei relates that Somkid was speaking last week during a
special meeting held to discuss the airline's future. As the chair
of the meeting, the deputy premier ordered Thai Airways and related
agencies to set up a working group to come up with a rehabilitation
plan. Whether the national flag carrier would remain as a state
enterprise depended on the quality of the plan, Somkid warned.
According to the report, the meeting was also attended by officials
from the Finance Ministry and Transport Ministry, as well as
representatives of state-owned oil company PTT and other private
Thai conglomerates such as food processing and telecoms group
Charoen Pokphand, retail collective Central Group, and beverage and
real estate outfit TCC Group.
A solution must be finalized this week, or before the cabinet
decides the airline's fate at a meeting that could be held as early
as April 28, the report says.
The Nikkei says some analysts expect Thai Airways to offer new
shares for the first time in 10 years. Fellow state enterprises
like Airports of Thailand and PTT are reportedly considering
investing in the airline. From the private sector, TCC Group, run
by Charoen Sirivadhanabhakdi, Thailand's third-richest man, has
also been mentioned as a potential investor.
Privatizing the national flag carrier, however, may prove
difficult, the report states. Thai Airways is important for Thais
going abroad, including King Maha Vajiralongkorn, who spends most
of his time in Germany. This will likely remain so even after the
pandemic. If the company survives, the report says.
The Nikkei relates that Finance Minister Uttama Savanayana on April
16 said the sale of the national flag carrier to the private sector
was not discussed at the special meeting. Although the PTT and AOT
both denied the rumors, it is likely that one or more state
enterprises may end up lending a helping hand to the carrier.
According to the report, Thai Airways is not the only Asia-Pacific
airline in trouble as the pandemic all but shuts down international
tourism. Virgin Australia Holdings, which held one-third of its
home continent's aviation market, on April 21 entered voluntary
administration, which means directors have admitted that the
company is out of money and have handed it over to insolvency
administrators.
This is equivalent to Chapter 11 bankruptcy provision in the U.S.,
the report notes
Before the virus hit, Thai Airways was also experiencing a slump.
The airline announced a net loss of THB12 billion for 2019, its
third straight year in the red, the Nikkei discloses. Total
shareholder equity was THB11.7 billion at the end of 2019, down
42.5% from the previous year. Compared with the end of 2010, when
the airline most recently raised capital, total shareholder equity
has decreased by 84.5%.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Asia Pacific is a daily newsletter co-
published by Bankruptcy Creditors' Service, Inc., Fairless Hills,
Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA.
Marites O. Claro, Joy A. Agravante, Rousel Elaine T. Fernandez,
Julie Anne L. Toledo, Ivy B. Magdadaro and Peter A. Chapman,
Editors.
Copyright 2020. All rights reserved. ISSN: 1520-9482.
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