Fitch grades Hayleys PLC to 'A+(lka)'

Fitch Ratings Lanka has downgraded Hayleys PLC's National Long-Term rating to 'A+(lka)' from 'AA-(lka)'.

The Outlook is Negative.

The downgrade reflects Hayleys' increased appetite for financial leverage at the holding company (HoldCo), as reflected in the company's heightened use of borrowings in 2010 and 2011 to fund its three large acquisitions that have protracted payback periods.

Hayleys' rating also factors in the heightened risk to the group's cash flows stemming from the weak economic outlook in its key export markets, the European Union and North America (50% of FY11 (end-March 2011) revenue).

However, Fitch expects better performance in Hayleys' consumer, agriculture, power, transport, and leisure segments domestically to help offset export-oriented risks to an extent.

The rating also factors in Fitch's view that Hayleys may need to extend financial support to its textile company - Hayleys MGT Knitting Mills PLC (HMGT, 'BBB(lka)'/Negative, 57% direct-ownership), as the latter is undergoing a restructuring process.

The rating will remain constrained over the medium-term due to Hayleys' higher appetite for financial leverage, the uncertainty stemming from weak demand in the company's key export markets, and the uncertainty surrounding the final outcome of HMGT's restructuring process.

Negative rating pressure may also occur if financial leverage at Hayleys' key operating subsidiaries increases on a sustained basis, due to weaker-than-expected performance in end-markets, cost overruns in refurbishments, or higher debt-funded dividend payouts or acquisitions, among other factors.