Sri Lanka’s Fitch affirms ratings of seven Finance Companies

Fitch-Ratings

Aug 11, 2015 (LBO) – Sri Lanka’s Fitch Ratings has affirmed the ratings of People’s Leasing and Finance, Central Finance Company, Melsta Regal Finance, Siyapatha Finance, Senkadagala Finance, AMW Capital Leasing And Finance and Singer Finance.

The full text of the announcement is reproduced below.

Fitch Ratings-Colombo/Singapore-11 August 2015: Fitch Ratings has affirmed the ratings of People’s Leasing & Finance PLC (PLC), Central Finance Company PLC (CF), Melsta Regal Finance Ltd (MRF), Siyapatha Finance PLC (Siyapatha), Senkadagala Finance PLC (Senka), AMW Capital Leasing And Finance PLC (AMCL) and Singer Finance PLC (SFL).

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND SENIOR DEBT

Finance Companies with Institutional Support Driven Long-Term Ratings

PLC’s Issuer Default Rating (IDR) and National Long-Term Rating reflect Fitch’s view that PLC’s parent, the state-owned and systemically important People’s Bank (PB; AA+(lka)/Stable), has a high propensity but limited ability to provide extraordinary support to PLC if required. PB’s high propensity to provide support to PLC stems from its 75% shareholding in PLC and a common brand. In addition, PLC accounted for 12.6% of PB’s loan book and 24.4% of PB’s consolidated post-tax profits in end-2014. and PLC has 108 window offices within branches of PB.

PB’s limited ability to provide support to PLC is evident from its own ‘AA+(lka)’ rating, which is driven by the government of Sri Lanka’s (BB-/Stable) high propensity but moderate ability to provide support to the bank under extraordinary situations.

The two-notch differential between the National Long-Term Ratings of PLC and PB reflects Fitch’s view that timely support from the state may be constrained by regulatory restrictions between the entities (such as maximum exposure limits) or administrative delays usually seen in layered support structures.

PLC is the largest non-bank financial institution (NBFI) in Sri Lanka in terms of assets, with a 12.6% share of sector assets at March 2015.

AMCL’s rating reflects Fitch’s view that support would be forthcoming from Associated Motorways Private Limited (AMW), which owns 90% of AMCL, given the finance company’s strategic importance to the parent. This is based on AMCL’s role in the group, given strong synergies and operational integration. While its share of financing of AMW’s vehicle sales has remained moderate, AMCL accounted for a substantial share of group profit and assets at end-2014. About 46% of its advances comprised vehicle finance facilities provided to its parents’ clients at end-2014. Fitch believes that additional incentives for AMW to provide support to AMCL stem from the common AMW brand, which could have high reputational impact on AMW should AMCL default. In addition AMCL’s funding relies on the parent, which provided 48% of AMCL’s borrowings at end-March 2015.

SFL is rated two notches below its parent, retailing company Singer (Sri Lanka) PLC (Singer; A-(lka)/Stable). This reflects Singer’s majority ownership in SFL, the common Singer brand and Singer’s influence on SFL’s strategic direction through representation on the finance company’s board. The two-notch differential also reflects SFL’s limited role in the group; SFL finances a low proportion of Singer’s sales (2010-2014: an average of 8% of Singer’s sales). Fitch expects SFL’s contribution to Singer’s sales to remain low in the medium term.

Although not planned, the disposal of SFL would not materially alter the group’s operations or earnings as the parent’s sales growth is supported by the presence of a well-managed in-house hire-purchase portfolio. SFL contributed an average of 16% to group EBIT for 2011 to 2014.

SFL’s rating also reflects its standalone credit profile, which Fitch has assessed to be at the same rating level. SFL’s National Long-Term Rating reflects higher capitalisation levels compared with its peers amid modest loan growth and improved asset-quality metrics.

Siyapatha’s ratings reflect Fitch’s view that support would be forthcoming from its parent, Sampath Bank PLC (SB; A+(lka)/Stable), which owns 100% of Siyapatha and involvement in the strategic direction of Siyapatha through board representation.

Siyapatha is rated two notches below its parent because of Siyapatha’s limited role in the group’s core business. SB’s leasing book accounted for just 4% of group advances at end-2014, of which Siyapatha provided 29%. Since its conversion to a licensed finance company, Siyapatha ceased to share a common brand with its parent while branches situated within SB’s premises have also decreased. Siyapatha’s contribution to group profit remains low, averaging 5% of group profit for 2012 to 2014. Fitch does not view a potential disposal of Siyapatha, which is not being planned, as being material to the group.

MRF’s rating reflects Fitch’s expectation of support from its ultimate parent, Distilleries Company of Sri Lanka (DIST; AAA(lka )/Stable). DIST has full effective ownership of MRF through Melstacorp Limited, the investment holding company for DIST’s non-beverage assets. DIST’s ability to support the entity is based on its market leadership in alcoholic beverage production in Sri Lanka, a highly profitable sector characterised by relatively stable demand through economic cycles and high entry barriers.

MRF is rated four notches lower than DIST due to MRF’s insignificant role in the group. MRF has limited synergies with the group’s core business, a low level of operational integration, and a lack of a common brand with the group. MRF accounted for just 1.3% of group revenue, 1.2% of consolidated net profit and 5.3% of group assets in the financial year ended March 2015. Although not planned, the disposal of MRF would not materially alter the group’s operations or earnings.

Finance Companies with Long-Term Ratings Driven by Intrinsic Strength
CF’s rating continues to be supported by its strong capitalisation, which stems from robust profitability and high profit retention, and a better funding profile than its peers due to a higher proportion deposits that are sourced from its established franchise. However, these strengths are counterbalanced by weakening asset quality and lower provisioning levels compared to peers. CF’s Outlook has been maintained at Stable on Fitch’s expectation of a sustained improvement in asset quality.

Senka’s ratings reflect its satisfactory credit profile through economic cycles, strong franchise and access to long-term institutional funding. SFC’s asset quality remains weak due to its inability to dispose of repossessed vehicles in a timely manner.

The senior unsecured debentures of PLC, Siyapatha, Senka and SFL, and the senior secured debentures of SFL and CF are rated in line with their National Long-Term Ratings according to Fitch criteria. Fitch has not provided any rating uplift for the collateralisation as the secured notes’ recovery prospects are considered to be average and comparable with those of unsecured notes in a developing legal system.

SUBORDINATED DEBT
Subordinated debentures of Siyapatha, CF and Senka are rated one notch below their National Long-Term Ratings to reflect the subordination to senior unsecured creditors.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT

Finance Companies with Institutional Support Driven Long-Term Ratings

PLC’s ratings may be downgraded if PB is no longer a majority shareholder in PLC, or if PB’s ability to provide support weakens, or if PLC’s strategic importance to its parent diminishes over time.

AMCL’s rating is sensitive to changes in its parent’s ability and propensity to provide support. The rating may be downgraded if AMCL’s size relative to AMW increases and if its operations become more independent of that of its parent, or if the parent’s credit profile weakens.

SFL’s rating may be upgraded if there is a significant increase in SFL’s strategic importance to Singer. One indication for this could be closer strategic alignment between the two entities resulting in consistently and sustainably higher financing for Singer’s customers.

A rating upgrade could also result if SFL is able to continue to maintain its capitalisation and asset quality metrics at levels comparable to higher rated peers while achieving a stronger franchise relative to its higher rated peers.

Sustained deterioration in SFL’s capitalisation and asset quality relative to its similarly rated peers would result in a downgrade of SFL’s standalone rating. 

Siyapatha’s rating could change if SB’s rating changes or if Siyapatha’s strategic importance to the bank changes. Narrower notching could result from higher importance to the group through greater synergies, shared brand, and closer operational integration while retaining majority-ownership by SB.

MRF’s rating may be downgraded if there is a decline in DIST’s ability or propensity to provide support. This may stem from a downgrade of DIST’s National Long-Term Rating, or weakening linkages between DIST and MRF. An upgrade of MRF’s rating would only result from an increase in DIST’s willingness to provide support as DIST’s ratings are already at the top of the national rating scale. Narrower notching could result from MRF’s stronger operational integration or higher importance to the group.

Finance Companies with Long-Term Ratings Driven by Intrinsic Strength

CF’s rating could be downgraded if it asset quality deteriorates further alongside weakening capitalisation. Fitch does not see an upgrade as likely in the medium term given the current pressure on CF’s asset quality and low provisioning cover.

An upgrade of Senka’s rating is contingent upon maintenance of stronger capitalisation and a more robust deposit franchise that would allow the company to expand in a controlled manner. Senka’s rating could be downgraded if asset quality continues to weaken, leading to a material decline in capitalisation or excessive asset encumbrance.
The ratings on the senior debt of PLC, Siyapatha, Senka, and SFL will move in tandem with their National Long-Term Ratings.

SUBORDINATED DEBT
The assigned subordinated debt ratings will move in tandem with the institution’s National Long-Term Ratings.

The following ratings have been affirmed:

People’s Leasing & Finance PLC:
Long Term Foreign-Currency Issuer Default Rating at ‘B+’; Outlook Stable
Long Term Local-Currency Issuer Default Rating at ‘B+’; Outlook Stable
National Long-Term Rating at ‘AA-(lka)’; Outlook Stable
National Long-Term Rating for senior unsecured debt at ‘AA-(lka)’
National Long-Term Rating for senior unsecured debt at ‘AA-(lka)(EXP)’
Central Finance Company PLC:
National Long-Term Rating at ‘A+(lka)’; Outlook Stable
National Long-Term Rating for senior secured debt at ‘A+(lka)’
National Long-Term Rating for senior unsecured debt at ‘A+(lka)’
National Long-Term Rating for subordinated debt at ‘A(lka)’
Senkadagala Finance PLC
National Long-Term Rating at ‘BBB+(lka)’; Outlook Stable
National Long-Term Rating for senior unsecured debt at ‘BBB+(lka)’
National Long-Term Rating for subordinated debt at ‘BBB(lka)’
Singer Finance (Lanka) PLC
National Long-Term Rating at ‘BBB(lka)’; Outlook Stable
National Long-Term Rating for senior secured debt at ‘BBB(lka)’
National Long-Term Rating for senior unsecured debt at ‘BBB(lka)’
AMW Capital Leasing And Finance PLC
National Long-Term Rating at ‘BBB+(lka)’; Outlook Stable
Siyaptha Finance PLC
National Long-Term Rating at ‘A-(lka)’; Outlook Stable
National Long-Term Rating for senior unsecured debt at ‘A-(lka)’
National Long-Term Rating for subordinated debt at ‘BBB+(lka)’
Melsta Regal Finance Ltd:
National Long-Term Rating at ‘A+(lka)’; Outlook Stable