Fitch Downgrades Abans Plc to 'BBB+(lka)'; Outlook Negative

Fitch Ratings-Colombo/Sydney-31 October 2014: Fitch Ratings has downgraded Sri Lanka-based
retailer Abans Plc's National Long-Term Rating to 'BBB+(lka)' from 'A-(lka)'. Fitch has also
downgraded the National Long-Term Rating on Abans' unsecured redeemable debentures to
'BBB+(lka)' from 'A-(lka)'. Fitch has affirmed Abans' outstanding commercial paper at National
Short-term Rating of 'F2(lka)'.
The one-notch downgrade reflects Fitch's view that Abans' medium-term net leverage is likely
to remain above 4.5x, the level at which Fitch would consider negative rating action. The
Negative Outlook reflects continued pressure on profitability stemming from a shift towards
products with lower margins and risks associated with investments outside the company's core
business.
Abans changed its name from Abans Limited in January 2014.
KEY RATING DRIVERS
Weakening Credit Metrics: Abans' net leverage, as measured by adjusted net debt/EBITDAR
(excluding finance subsidiary Abans Finance Plc), increased to 8.05x in the financial year ended
31 March 2014 (FY14) from 5.25x in FY13. Abans' fixed-charge coverage (EBITDAR/gross interest
+ rent, excluding finance subsidiary Abans Finance Plc) deteriorated to 0.82x in FY14 from 1.34x
in FY13. The deterioration was mainly due to EBITDAR margin (excluding Abans Finance Plc)
contracting to 6.5% in FY14 from 9.2% in FY13 because of subdued demand, intense competition
and a shift towards lower margin products. Although the company has plans to reduce its debt,
Fitch expects Abans' leverage to remain above 4.5x in the medium term due to a weak recovery
in EBITDAR margins.
Leading Consumer Durable Retailer: Abans is one of the leading retailers of consumer durables
in Sri Lanka, and it has a strong brand portfolio and extensive distribution network. Abans'
revenues are supported by its in-house hire-purchase operations, which contributed to 40% of
the revenues in FY14. Abans's hire-purchase book is prudently managed with higher down
payment requirements and an efficiently and closely monitored recovery system, which has
helped the company maintain a low delinquency rate.
Cyclicality of the Industry: Demand for Abans' products tends to be volatile across business
cycles due to the non-essential and relatively high prices of consumer durables. However, the
recent reduction in domestic electricity tariffs and substantial decline in lending rates bodes
well for the industry's revenue. Retailers are also affected by foreign-currency risk on inventory
because most products are imported. Abans has managed to lower this risk by selling locally
produced items, which accounted for 20% of products in FY14.
Real Estate Project Risk: Abans's investment in a mixed-use development called Colombo City
Centre will be capped at LKR1.9bn, most of which was incurred in FY14. Even though the equity
contribution is capped, any delay in debt funding or pre-sales of the project could result in
further capital calls for Abans. Furthermore, any delays to construction, which is due to run
from FY15-FY17 could increase the business risk for Abans. Abans is undertaking the project,
which has retail, hotel, and apartment components, with Singapore-based Silver Needle
Hospitality.
Evolving Corporate Governance: Abans continues to engage in significant related party
transactions with entities outside of the group. However, Abans has taken measures to improve
corporate governance, establishing audit and remuneration committees and divesting several
non-core entities to help streamline the financial reporting process.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating
action include:
- A sustained increase in Abans' adjusted net debt/EBITDAR excluding Abans Finance Plc to over
5.5x
- Fixed-charge coverage reducing below 1.25x on a sustained basis
- A material delay in progress on the Colombo City Centre project or additional capital calls for
the project
- Any delay in the scheduled repayments from related parties.
Positive: No positive rating action is expected given that the rating is on Negative Outlook.
However, future developments that may individually or collectively lead to the Outlook being
revised to Stable include:
- Smooth progress of the Colombo City Centre project, which will limit Abans' financial liability
to the initial investment value.
- Improvement in the retail environment as reflected in sustained improvement in EBITDAR
margins above 7%
Contact:
Primary Analyst
Nadika Ranasinghe, CFA
Vice President
+94 11 254 1900
Fitch Ratings Lanka Limited
Level 15-04 East Tower
World Trade Center Colombo 01
Secondary Analyst
Shyamila Serasinghe
Analyst
+94 11 254 1900
Committee Chairperson
Vicky Melbourne
Senior Director
+612 8256 0325
Media
Relations: Bindu
Menon,
bindu.menon@fitchratings.com.

Mumbai,

Tel:

+91

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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
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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 at www.fitchratings.com.
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