Some rated Sri Lankan corporates are more affected by the challenging macroeconomic environment stemming from the Sri Lanka sovereign’s distressed credit profile, Fitch Ratings says.
Fitch in April downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘C’. The Long-Term Local-Currency IDR was affirmed at ‘CCC’.
Sri Lankan corporates are grappling with rising costs and weakening disposable incomes, while the country’s weak foreign-currency reserves will continue to pressure imports, and the unprecedented spike in interest rates will raise borrowing costs and weaken financial flexibility.
Fitch downgraded the National Long-Term Rating on Singer (Sri Lanka) PLC to ‘A+(lka) and revised the Outlook on Abans PLC’s ‘AA-(lka)’ rating to Negative as the two consumer electronics retailers are most immediately affected by the developments.
Many other corporates face revenue and margin pressure from either their exposure to imported goods, discretionary demand, government expenditure, or high short-term debt. However, most rated corporates have adequate headroom in terms of low leverage, sufficient interest cover and liquidity to weather challenges in the next 12 months. Despite the challenges in the last 12 months, Fitch estimates that the aggregate leverage of rated corporates in Sri Lanka remained steady at around 1.5x in the fiscal year ended 31 March 2022 (FY22).
Fitch forecast the aggregate revenue of rated corporates to fall by around five per cent in FY23 and EBITDAR margins to narrow by around 200 bp due to weakening demand and rising costs. We expect leverage to rise to around 2.0x as a result, with EBITDAR coverage of interest and rent falling to around 4.0x from 6.5x.
Corporates with exposure to discretionary demand, imported finished goods or government expenditure should see revenue fall by a sharper 15-20 per cent on average. Our expectations compare with an estimated 10 per cent increase in revenue and 100bp squeeze in EBITDAR margins in FY22. The performance in FY22 was supported by some issuers’ exposure to defensive demand or exports, while others operate in sectors that benefitted from a scarcity of imports and were better able to access local banks than smaller counterparts to support that demand.
Many companies also cut costs and rationalised capex to preserve cash and maintain balance-sheet quality, although their ability to continue to do so may prove challenging beyond the near term. A continued sharp decline in demand and cost inflation beyond that timeframe could exert further pressure on corporate ratings.