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Fitch Ratings - Colombo - 28 May 2021: Fitch Ratings has affirmed Sri Lanka-based Kotagala Plantations PLC's National Long-Term Rating at 'RD(lka)' (Restricted Default). Fitch has also assigned a national rating to Kotagala's restructured senior unsecured debentures of 'C(lka)'. The instrument rating reflects Fitch's assessment that the debenture holders are materially subordinated to secured bank debt.
The affirmation reflects Kotagala's ongoing debt-restructuring process, with the company still to reach an agreement with a majority of its lenders.
Majority of Loans Unresolved: Kotagala is in the process of restructuring around LKR1.9 billion of bank debt as of end-March 2021 (FY21). It has managed to extend the maturities of some loans at a reduced interest rate in exchange for timely settlement using a tripartite agreement. This involves tea brokers remitting proceeds from the company's revenue directly to banks, with any balance reaching Kotagala to meet operating expenses. The long-term efficacy of this mechanism depends on the productivity of the company's tea estates and tea prices.
Debenture Restructured: Kotagala restructured its two remaining debenture tranches, which amount to LKR500 million, in September 2020. The restructure involved pushing back maturities to August 2026 and reducing the interest rate to 7.5%, from 14.8% and 15.0% for type C and D, respectively, using a tripartite agreement with a tea broker that channels revenue to the debenture trustee for the settlement of dues. Unrelated investors will be given payment priority over related parties for both tranches as part of the restructure.
Unsustainable Cost Structure: We expect Kotagala's EBITDA to turn negative in FY22, from an estimated LKR35 million in FY21, following structural losses in its rubber segment (FY20: -LKR232 million), but also due to our expectation of moderating tea prices and higher costs. We do not expect a meaningful turnaround in the rubber segment, as we believe Kotagala's investments in rubber will be inadequate to improve yields.
Kotagala's rubber segment has been on a structural decline due to weak prices and falling production levels; rubber production fell to 1,403 tonnes in FY20, from 2,580 tonnes in FY17. The increase in daily wages to LKR1,000, with effect from March 2021, is likely to result in a 13% rise in direct costs, which would exacerbate Kotagala's inability to generate gross profit in the next two years. Kotagala expects the increase in machine-plucked teas should mitigate higher labour costs, although the efficacy of this strategy is yet to be seen given it was only implemented in FY20.
High Statutory Arrears: Kotagala is running arrears in FY21 of LKR1.3 billion in relation to employee pensions, gratuity provisions and government lease rentals. In response, it plans to pay court-directed charges related to employee obligations and has agreed to a monthly payment mechanism with authorities for pension contributions. However, we believe this is still likely to be challenging. Lease rental arrears will be met via the annual harvesting of timber trees, together with any proceeds from its ongoing legal case against the Urban Development Authority related to one of its estates.
Unencumbered Assets, Rights Issue: Kotagala says it had around LKR260 million in unencumbered assets as of FY20, which included ownership stakes in the plantation and leisure sectors. However, we believe the company's ability to raise funds through timely asset sales may be limited given the weak operating environment.
In December 2020, Kotagala made public its plan to raise LKR789 million via a rights issue, which is yet to be approved by the Colombo Stock Exchange. This includes LKR200 million of new money, to be used for working capital purposes and debt settlement, with the balance taking the form of a conversion of related-party payables to equity.
Weak Linkages with Parent: Fitch rates Kotagala on its standalone strength due to our assessment of weak linkages between Kotagala and its stronger ultimate parent, The Colombo Fort Land and Building PLC (CFLB), which effectively owns 61% of Kotagala. CFLB has provided limited support in the form of related-party payables, but this has not been material enough to avoid default and we therefore assess strategic ties as weak. Kotagala's legal and operational ties with CFLB are also weak, based on our Parent and Subsidiary Rating Linkage Criteria.
Kotagala's rating is driven by its debt-restructuring process for its bank loans and is therefore multiple-notches lower than the rating of its closest peers on the Sri Lanka national scale.
- Revenue to fall by 7% in FY22 to LKR2.9 billion, from an estimated LKR3.2 billion.
- EBITDA generation of LKR35 million in FY21 and then an EBITDA loss of LKR189 million in FY22 due to increase in daily wages and our expectation of moderating commodity prices.
- Capex of around LKR90 million a year over FY21-FY24.
- No dividend payments.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Following a possible financial restructuring and once sufficient information is available, the rating will be upgraded to reflect the appropriate National Long-Term Rating for the post-restructuring capital structure, risk profile and prospects in accordance with our criteria.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Kotagala entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedures or if it ceases operation.
Poor Liquidity: Kotagala only had LKR38 million in cash at end-December 2020 to meet LKR1.1 billion in debt maturities falling due in 2021. Of this, around LKR220 million was short-term commercial paper, which was secured against short-term investments in money-market funds worth LKR217 million. Kotagala does not have the necessary funds to meet most near-term debt obligations, and access to new capital is poor. We also believe Kotagala's ability to service its interest obligations remains a challenge, as we forecast EBITDA to remain negative in FY22 and FY23 (last 12 months ended December FY21 EBITDA/interest cover: -0.6x).
The principal sources of information used in the analysis are described in the Applicable Criteria.
ENTITY/DEBT | RATING | PRIOR | ||
Kotagala Plantations PLC | Natl LT | RD(lka) | Affirmed | RD(lka) |
senior unsecured | Natl LT | C(lka) | New Rating |
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