Free Hold

ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd., an associate of Moody’s Investors Service, has assigned an Issuer rating of ‘[SL] A-’ with stable outlook to Lanka Orix Leasing Company PLC. The rating indicates adequate-credit-quality and the rated entity carries average credit risk. The rating in Sri Lanka is assigned on an eight-point scale developed specifically for the country, and ranges from ‘[SL] AAA’ to ‘[SL] D’. This rating scale ranks the relative default risk associated with issuers in Sri Lanka.

The rating factors the LOLC Group’s long track record of profitable operations, its position as the market leader in the Sri Lankan leasing business market, professional and experienced management team, adequate risk management systems with strong retail franchise. The rating also takes into account the committed support and oversight from its largest investor-ORIX Corporation of Japan (rated Baa2 with stable outlook by Moody’s) which has a 30% stake in the entity. ICRA has taken note of the ongoing restructuring exercise wherein it will transition into a holding company and the finance businesses will be carried out in its subsidiaries, leading to moderation of the standalone earnings profile of the HoldCo as the existing lending portfolio runs down.

However, given the significant operational and financial linkages with the subsidiaries (especially pertaining to financial services), ICRA Lanka has taken a consolidated rating view of the HoldCo and the key asset financing subsidiaries. The view is corroborated by the service level agreements between LOLC and its subsidiaries to upstream cash flows. LOLC’s standalone earnings would mainly comprise of shared services fees and dividends from subsidiaries and investment gains. ICRA has also taken note of the management’s commitment to de-leverage the HoldCo from the current gearing of 2x as on March 2012 to 1.2x by March 2013 by reducing intra-group exposures and the run-down of its lending book. Maintaining stable cash flows and a deleveraging of the HoldCo would remain key sensitivities.

The refinancing risk of the Group is low given the strong franchise, good relationship with lenders with adequate back-up lines, its liquid investment portfolio and the key subsidiaries’ access to retail deposits despite LOLC’s short term asset-liability maturity mismatch remaining high as short term borrowings have been used to fund long term investments. Further, the Group is planning to raise long term funds from overseas lenders which would correct maturity gaps to an extent. ICRA also expects no major equity investments/ acquisitions by the HoldCo in the near term and expects the entity to focus on improving its ALM position going forward. LOLC Group mainly operates in the area of leasing and hire purchase of automobiles (with over 80% share in total portfolio) and its largest customer segment comprises of small and medium business enterprises for working capital finance. The asset quality of the group’s lending portfolio has been better than that of its peers though marginally affected in the current financial year reducing to 1.8% as on March 31, 2012 from 1.6% as on March 31, 2011. Over the past 2 years, the Group has diversified its presence across leisure and energy ventures, but the financial services are likely to remain the group’s mainstay over the medium term.

The HoldCo’s earnings profile would moderate from the past as the shared services fee income from subsidiaries would be the mainstay of the company going forward. Dividends from subsidiaries would remain volatile given that the financial service subsidiaries are likely to plough back earnings into the business, while the earnings profile of the leisure ventures are vulnerable to economic volatilities. During fiscal 2012, LOLC’s profitability was supported by investment gains of Rs. 5.2 billion but suffered an operational loss of Rs. 777 million.
At the end of March 2012, financial services contributed 72% of the operating profits of the group, Leisure contributed 23%, while interests in trading, plantations and insurance contributed the rest.

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