Fitch Downgrades Sri Lanka's Abans to 'A-(lka)';

Fitch Ratings has today downgraded Sri Lanka's Abans (Pvt) Ltd's (ABL) National Long-term rating to 'A-(lka)' from 'A(lka)'. The Outlook is Stable.

The downgrade reflects weaknesses in its

management information system (MIS), coupled with

concerns regarding the quality and timeliness of

information provided by the company to Fitch.

These concerns come on the back of significant

adjustments to management's financial accounts by

the company's auditors - subsequent to a

presentation to Fitch - which resulted in a

significant deviation in ABL's performance for

the 12 month period to end-March 2009 (FYE09).

Fitch does note that ABL's credit metrics, based

on expected improved leverage through reduced

debt levels, expected improvements of interest

coverage and strong liquidity due to availability

of sizable unutilised bank facilities (LKR1.3bn

as at December 2009) is strong for the current

rating level. However, the significant delay in

Fitch obtaining audited accounts for the ABL

group, LKR172m reversals of sales at ABL (given

the reorganisation in the retail channel), and a

yet to be resolved FYE09 tax payment in the

newly-created subsidiary Abans Retail Private

Limited (ABRL) are highlighted as concerns.

Interest coverage as measured by fund flow from

operations (FFO) to interest for the retail

segment (ABL and ABRL) was approximately 1.4x in

the seven months to October 2009 (FYE09: 1.8x).

As of October 2009 based on management's

unaudited statement, the retail segment's total

debt outstanding had decreased to LKR1.9bn

(FYE09: LKR2.5b). This improved the estimated

leverage (total adjusted debt net of cash to

operating EBITDAR) to 2.7x (FYE09: 3.0x).

Although monthly sales during March 2009-October

2009 has been weak compared to FY09's monthly

average, the impact of a fall in operating

EBITDAR was offset by a reduction in debt levels

at the retail segment.

Fitch expects ABL's revenues to improve in H210

based on current low inflation and low interest

rates. ABL's retail segment has managed to

improve its profit before tax margin to 3.0% by

October 2009 (FY09: 1.6%), discontinuing the

negative net profit trend.

Fitch further notes with concern the weak

performance of Abans Financial Services Ltd.

(AFS). AFS' gross NPL at the regulatory six-month

level at March 2009, as a percentage of gross

loans of LKR1.0bn, was 9.5%. This compares to the

sector average of 4.1% at end-March 2009 (the

sector consists of 13 registered finance

companies accounting for over 60% of total sector

assets, excluding those related to the Ceylinco

Consolidated Group). AFS's negative contribution

weighs down ABL's group performance.

Positive ratings triggers include an improvement

in its MIS, and the release of timely detailed

information which increases the credibility of

the operational controls within ABL. Fitch also

highlights the lack of an independent director-

led audit committee at ABL, given the size of the

group. However, ABL's management has indicated

that it is looking at this issue over the near

term.

ABL's rating takes into account its market

position in the domestic consumer durables

industry, the strength of its brand franchises

(particularly for the LG brand), and its strong

distribution network.