Feb 29, 2012 (LBO) – Fitch Ratings Lanka has lowered Lanka Orix Leasing Company’s rating from ‘A-(lka)’ to ‘BBB+(lka)’ with a negative outlook with a similar cut in outstanding senior unsecured debentures. The rating is still in the investment grade.
Fitch said the downgrade came from a “higher appetite for market risks” at the holding company with debt funded equity to 11.7 billion rupees in the year to December 2011 from 7.1 billion a year earlier.
LOLC has said it has taken a number of measures by February 27, to cut debt funded investments at the holding company to 5.6 billion rupees.
The full statement is reproduced below
Fitch Downgrades LOLC to ‘BBB+(lka)’/Negative Outlook
Fitch Ratings-Colombo/Taipei/Mumbai-28 February 2012: Fitch Ratings has downgraded Lanka ORIX Leasing Company PLC’s (LOLC, HoldCo) National Long-term rating to ‘BBB+(lka)’ from ‘A-
The Outlook is Negative. The agency also downgraded LOLC’s outstanding LKR1.25bn
senior unsecured redeemable debentures due in 2015, to ‘BBB+(lka)’ from ‘A-(lka)’.
“The downgrade reflects LOLC’s higher appetite for market risks at the HoldCo, as demonstrated
by the increase in debt-funded group- and trading-equity investments to an estimated
LKR11.7bn during the 12 months to 31 December 2011 (31 December 2010: LKR7.1bn). As a
result, financial leverage at the HoldCo (net debt/cash operating profit from recurring sources
before interest expenses) increased to 14.5x at FYE11 (FYE10: 10.2x).
LOLC has confirmed that a number of measures were taken as at 27 February 2012 which it
expects will reduce debt-funded investments at the HoldCo to reduce to an estimated
LKR5.6bn. However it is the agency’s view that, LOLC has not demonstrated its sustained ability
/ willingness to maintain a capital structure and debt maturity profile in line with a higher
rating, and that the company could resort to debt-financing a considerable proportion of future
acquisitions or expansions.
The Negative Outlook reflects the uncertainty surrounding LOLC’s strategy of funding future
investments and expansions of the group, and its implications on HoldCo creditors. While a
demonstrated and sustained reduction in debt-funded equity investments and financial
leverage at the HoldCo over the next 12 – 24 months could result in a Stable Outlook, LOLC’s
limited ability or willingness to do so could result in further negative rating action.
As LOLC is progressing towards a HoldCo structure, the company will increasingly have to rely
on cash (in the form of dividends and fees) from operating subsidiaries for timely repayment of
its own obligations. However, most of its key subsidiaries are experiencing rapid asset growth
or are otherwise limited in their ability to payout adequate dividends and fees to the HoldCo
over the medium-term.
At end-December 2011, the HoldCo’s short-term interest bearing liabilities maturing in less than
12 months exceeded estimated interest earning assets of the same maturity by over LKR9.3bn,
exposing the company to high refinancing- and interest rate risks. Given this mismatch, Fitch
estimates that HoldCo borrowing costs will rise by around LKR91m (+6%) if market interest
rates were to increase by 100bps across short-term maturities.
Recurring profitability at LOLC is evolving as it transitions to a HoldCo. Operating cash profit
from recurring sources, before interest expense at the HoldCo, covered interest payments by
1.49x at end-December 2011, providing limited headroom to service interest payments if
market interest rates rise.
LOLC group’s financial services subsidiaries, which accounted for 80% of the group’s operating
profit at end-December 2011, continue to be well managed, with credit quality, profitability,
and a funding/lending franchise similar to, or better-than, rating peers. However, higher-thanpeer
leverage fueled by a rapid asset expansion at many such subsidiaries will limit the
quantum of dividends that the HoldCo can extract in a stressed scenario.
LOLC expects to increase medium-term capital expenditure in the leisure and power & energy
sectors, as newly acquired resorts are refurbished and new power-generation capacity is
brought online. Fitch notes that the leisure sector, in particular, is unlikely to sustain high
leverage given that cash flows are more susceptible to economic downturns, and may indirectly
burden LOLC and its better-performing subsidiaries.
In accordance with Fitch’s policies the issuer appealed and provided additional information to
Fitch that resulted in a rating action that is different than the original rating committee outcome.