September 4, 2014 / 10:27 AM / 3 years ago

Fitch Affirms Sri Lanka's Lion Brewery at 'AA-(lka)'/Stable

(The following statement was released by the rating agency) COLOMBO, September 04 (Fitch) Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC's (Lion) National Long-Term Rating at 'AA-(lka)'. The Outlook is Stable. The agency also affirmed the company's senior unsecured rating at 'AA-(lka)' and assigned an expected National Long-Term rating of 'AA-(lka)(EXP)' to Lion's proposed unsecured redeemable debentures of up to LKR2bn (USD15.4m). Lion plans to use the proceeds from the proposed debenture issue to refinance short-term facilities. The proposed debenturesare rated in line with Lion's National Long-Term Rating as they will rank equally with the company's other unsecured debt. Fitch will assign a final rating to the debenture subject to the receipt of final transaction documents conforming to information already received. KEY RATING DRIVERS High Leverage: Lion's leverage as measured by net adjusted debt/operating EBITDAR stood at 2.14x at the end of the 2014 financial year on 31 March 2013(end-FY13: 2.61x), and is expected to increase following the company's proposed acquisition of Millers Brewery Limited (MBL), including its trademarks, from Cargills (Ceylon) PLC (Cargills). However, we expect leverage to reduce over the medium term due to improving profitability. The proposed acquisition, announced in June, is contingent on MBL settling all its liabilities. The MBL acquisition follows Lion's extensive expansion of its production facility in Sri Lanka, which resulted in high debt over FY13 and FY14. Leverage was exacerbated by margin deterioration because Lion sold more costly imported beer in cans at the same price as its domestic output to meet demand. Lion stopped the imports half way through FY14 following the completion of additional capacity. Increased Production Capacity: The recent expansion of Lion's facility has almost doubled production capacity, which will allow Lion to meet additional demand without further significant debt-funded capex. This will leave cash flows available to pay down debt. In addition, the potential integration of MBL's production could enhance economies of scale. Market Leadership: Lion is the leading domestic beer manufacturer with a significant share of beer produced in Sri Lanka in 2012 and 2013. Its flagship product is the Lion brand of beer. The proposed MBL acquisition will be favourable for Lion's business risk profile as it is expected to further increase Lion's share of domestic output and strengthen Lion's hold on beer production in the country. The proposed acquisition will also bring new products such as MBL's Three Coins, Sando, and Grand Blonde brands, and give Lion access to Cargills' extensive retail chain. High Regulatory Risk: Domestic producers of alcoholic beverages face frequent and large increases in alcohol tax, which encourages consumers to turn to illicit sources and impacts industry profitability. The industry also faces restrictions on advertising and retail players, which benefit incumbent licensed players, such as Lion, which have already built up their distribution networks and established their brands. RATING SENSITIVITIES Negative: Future developments that may individually, or collectively, lead to negative rating action include: - Leverage of over 2.0x on a sustained basis - The rating could be downgraded if Lion is required to inject further cash or take on more liabilities to complete the acquisition. No positive rating action is expected over the next 24 months as leverage is likely to remain high. However, Future developments that may individually or collectively lead to a positive rating action include: - Leverage of below 1.5x on a sustained basis. Contact: Primary Analyst Shyamila Serasinghe Analyst +94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower World Trade Center Colombo 01 Secondary Analyst Kanishka De Silva Analyst +94 11 254 1900 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Additional information is available on Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014, and 'National Scale Ratings Criteria', dated 30 October 2013, are available on Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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