Interest rate pressure on Sri Lankan corporates – Fitch

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Interest rate pressure on Sri Lankan corporates – Fitch
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Rising domestic interest rates are expected to hurt Sri Lankan corporates over the next 12 months, according to Fitch Ratings.

Corporates’ borrowing costs have increased more than 200 bp in the 12 months to March 2017 as the Central Bank has increased policy rates by 125 bp and the statutory reserve ratio by 150 bp in an attempt to reign in aggressive credit growth, Fitch said in a media release on Tuesday.

Fitch said it doesn’t expect the pressure on interest rates to ease in the near term owing to rising inflationary pressures and weak external finances.

Annual inflation as measured by the Colombo consumer price index rose to 8.4 per cent in April 2017 from 4.3 per cent a year ago.

Corporates with high short-term working capital requirements such as retail and manufacturing companies are hurt the most by the recent rate increases.

“In Fitch’s view, the two large consumer-durable retailers, Singer Sri Lanka and Abans are the most affected of the entities we rate as most of their borrowings consist of short-term working capital financing and will have to be rolled over at higher rates. Furthermore, both companies realise 30 -40 per cent of their sales through hire-purchase schemes which can meaningfully weaken with rising interest rates and slow EBITDA growth. Fitch believes Singer has more headroom in its current rating to withstand these challenges compared with Abans,” the agency said.

Kotagala Plantations PLC may also face further liquidity pressure on account of higher interest payments. Fitch believes Hemas Holdings and Sunshine Holdings to be the least affected due to their low refinancing requirements during the next 12 months, the release said.

“We have assumed that 100 per cent of corporates’ short-term debt and 40 per cent of long-term debt will be re-priced at higher rates immediately. Most of the long-term debt stems from banks and around half of such debt are at a variable interest rate. As of end-March 2017, almost 50 per cent of the outstanding borrowings of Fitch-rated corporates consisted of short-term borrowings primarily funding working capital, exposing the companies to modest interest-rate risk at the point of refinancing. Only 12 per cent of the outstanding borrowings of Fitch-rated corporates consisted of debenture financing, which is predominantly on fixed rates,” Fitch said.