Fitch Ratings Lanka has downgraded Lanka ORIX Leasing Company PLC's (LOLC) National Long-term rating to 'A- (lka)' from 'A(lka)' with a ‘Negative Outlook’. “At the same time, the agency has assigned LOLC's proposed senior debentures of upto Rs 750 million a National rating of 'A-(lka)'. Fitch has also downgraded LOLC's proposed commercial paper's National short-term rating to 'F2(lka)' from 'F1(lka) and simultaneously withdrawn the rating as the issuance is no longer expected to proceed as previously envisaged,” the rating agency said this week.
It said the downgrade reflects the weakening of LOLC's risk profile due to significant debt-funded equity investments in group companies, as indicated by double leverage (measured as equity investments in group companies/own equity) which increased to 166% at Q311.
Further, LOLC's ongoing transition to a holding company (HoldCo) structure over the medium term increases the structural subordination for the HoldCo's creditors, whereby it would have to rely on cash flows from investments to service obligations, Fitch said.
“In the agency's view, any meaningful cash flows from investments, at least in the near term, will likely be largely limited to its key financial-services subsidiaries Lanka ORIX Finance Company Ltd (LOFIN, rated 'A- (lka)'/Negative, 100% ownership), and Commercial Leasing Company Ltd (CLC, rated A- (lka)/Stable, 100% ownership), both of which are subject to regulatory restrictions,” the agency added.
“The Negative Outlook indicates that LOLC's rating could be downgraded further if the planned reduction in double leverage fails to materialise, or, upon achieving a HoldCo structure, if leverage is not reduced to a level that can be comfortably serviced by sustainable cash flows from its investments, and a debt maturity profile and capital structure appropriate for an investment holding company is not achieved.
Fitch notes that there is no track record of equity infusion at the HoldCo-level to fund investments in group companies although dividends have not been declared for FY09 and FY10. The agency also notes that some of the subsidiaries may need capital infusion to fund expansions. Fitch further notes that future divestments of investments are subject to market risk at the point of exit. LOLC's ratings could also come under pressure if the financial profile of its key subsidiary LOFIN deteriorated (LOFIN's National Long-term rating has a Negative Outlook). This is also based on the agency's view that LOFIN and CLC are two of the HoldCo's key cash generating subsidiaries, while most other investments are in a growth phase, or are otherwise limited in their cash distributions to the HoldCo,” the Fitch statement said.
Fitch affirms CLC at 'A-(lka)' with stable outlook
Fitch Ratings Lanka has affirmed Commercial Leasing Company Ltd's (CLC) National Long-Term rating at 'A-(lka)' with a ‘Stable Outlook’. The agency has also affirmed CLC's senior unsecured debentures at 'A-(lka)', it said.
“CLC's ratings are driven by its standalone financial strength rather than support from its parent, Lanka Orix Leasing Company PLC (LOLC; A-(lka)/Negative). They reflect the company's sound asset quality and profitability and robust capitalisation. The Stable Outlook reflects the agency's view that CLC is likely to maintain credit metrics that are consistent with the current ratings,” the agency said this week. “Sustained improvements in CLC's credit profile could place upward pressure on its ratings.
Conversely, a weakening of capitalization due to, among other things, aggressive asset growth
without a commensurate build-up in earnings, or any large equity investments causing sustained pressure on its core profitability, could have downward pressure on CLC's ratings, as could a significant and sustained weakening of asset quality,” it said.
CLC is owned by LOLC and while there is some integration of core operations such as treasury and certain back-office functions, the two companies operate as separate entities,benefiting from strong brand franchises in their respective customer segments. CLC is an important contributor to LOLC's profits (FY10: 19% of post tax consolidated profit excluding contributions to minority interest) and is also important in broadening the customer base of the LOLC group, Fitch said.
Lanka ORIX Finance Company's outlook revised to ‘Negative’
Fitch Ratings Lanka has changed Lanka ORIX Finance Company Ltd's (LOFIN) outlook to ‘Negative’ from ‘Stable’. It’s National Long-term rating has been affirmed at 'A-(lka)'.
The outlook revision reflects LOFIN's weakened capitalization following rapid growth since the financial year ended 31 March 2009. Capitalization, as measured by equity/assets, gradually decreased to 9.2% at FYE10 from 14.3% at FYE09 before increasing to 13% in Q3FY11 following an equity infusion of Rs 1 billion from LOLC. |
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