Hayleys, LOLC concerned over Fitch ratings

A furore broke out this week between two Sri Lankan companies and a rating agency over negative rating announcements, in what is seen as the first public spat between a rating agency and a client.

It comes in the backdrop of serious questions being raised internationally for rating agencies after the global financial crisis some years ago triggered by Lehman Brothers which was rated 'A' by Fitch.

In probably the first time locally where a company has withdrawn a contract with a rating agency and the rating agency itself pulled out, blue chip conglomerate Hayleys said this week it was ending its agreement with Fitch Rating Lanka but didn't give reasons for the move though it was well known that the reason was for downgrading its National LongTerm rating with a negative outlook. Hayleys is learnt to have disputed the downgrade with sources at the company saying Fitch 'jumped the gun' and issued the statement when negotiations were still going on between the two sides. Fitch has said the downgrade "reflects Hayleys' increased appetite for financial leverage at the holding company as reflec- ted in the company's heightened use of borrowings in 2010 and 2011 to fund its three large acquisitions which have protracted payback periods." These applied in particular to borrowings to acquire Ceylon Intercontinental hotel which is now under refurbishment with the return on investment taking longer, and the Alumex acquisition. It said 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. In November 2010, Fitch warned - in an an- nouncement - that the Hayleys rating could be downgraded or affirmed over the near-term due to an additional Rs. 2 billion in debt raised to fund the November 4 Alumex acquisition which had resulted in "Hayleys' leverage (total adjusted net debt / EBITDAR) rising to a level no longer commensurate with the current ratings." However sources at Hayleys argued that the company was firmly in control of its debt and in terms of export markets, its order book at Dipped Products, Haycarb and other export ventures are full and wind-power projects are on stream. "There were (also) some unwanted things said about some of our shareholders," one source said, adding that the company has consulted its lawyers on the matter. Fitch's downgrade of rating for LOLC for the same reasons of greater risk owing to debt-funded investments also drew criticism from the company. Kapila Jayawardena, Group Managing Director of LOLC, said he was surprised and disappointed that Fitch didn't give LOLC time and due recognition to these developments which would have resulted in a much higher credit rating for LOLC. "The integrity, transparency, responsibility and reliability of credit rating agencies are important to the smooth functioning of a financial market and one weakness we see in Sri Lanka is that credit rating agencies are not supervised and accountable for their actions," he told the Business Times. LOLC is in transition from a financial institution to a conglomerate and Fitch is well aware of this, he said adding that universally financial institutions have a higher gearing ratio than conglomerates.

"We shared our plans with Fitch to considerably improve the leverage of the holding company before 31 March 2012 through identified increases in capital which would have made LOLC'S capitalization ratio's to be far superior than A rated peer companies. Fitch Sri Lanka however decided to have the rating committee meeting in February despite our request to move it to March or to a later date so that the evaluation can be based on our audited financials," he said. However unlike Hayleys, LOLC was not pulling out its contract with Fitch. Rating industry officials say that ratings for the corporate sector are purely voluntary and contracts with clients clearly have guidelines which explain that positive or negative ratings are released to the public. According to Fitch there are two kinds of ratings - public and private. Private ratings is where the company requests that the ratings are not made public at the start itself and it is up to the rated company to share its rating with investors and banks on a selective basis. If the company signs up for a public rating, the initial assessment and any follow-up and monitoring which results in a rating affirmation, upgrade or downgrade, is disseminated in the public domain.

Whether public or private, once the contract is entered into, Fitch reserves the right to make changes to a rating as and when it deems necessary.

The rating agency said it provides the rated company with a draft press statement prior to public dissemination so that any factual errors and can be amended. "However the qualitative assessment and Fitch's opinion is its prerogative. A company has the right to appeal a rating if they provide new information in a timely manner. As a policy, Fitch Ratings adopts its rating criteria and code of conduct seamlessly across the globe," it said.

When asked about the independence of a rating agency since it's a 'paid' service, Hasira De Silva, Vice President at Fitch Ratings Lanka, explained that the contract and the assessment operate independent of each other. "For example, the contract is handled by officials in Fitch's business and relationship management team, which is completely independent from the analytical team. This is essentially to differentiate the two and ensure there is no conflict of interests, and that assessments are an absolutely independent process." While ratings agencies have downgraded many companies in the past and not triggered any controversy as seen now, business analysts believe the present concern over negative ratings could be connected to the competitive business environment with enormous growth potential in the post-war era. "Companies are concerned about public perception with a scramble for good news to appear in the public domain. The clamour for awards is also part of the struggle to establish a 'good' name. Thus anything negative is perceived as not good for business," one analyst said.