Sri Lanka’s Mercantile Investments mulls subsidiary to hold leisure business

July 5, 2006 (LBO) — Finance company Mercantile Investments Ltd, plans to float a fully-owned subsidiary to hold their leisure investments, a credit rating report said. George Ondaatjie family, which controls 56 percent of Mercantile Investments, currently owns these investments as associate companies.

Mercantile
Investments has three associate companies catering to the tourism
segment:

  • Royal
    Palms Beach Hotels Ltd
  • Tangerine
    Beach Hotels Ltd
  • The Nuwara
    Eliya Hotels Ltd

Registered finances companies are currently banned from forming subsidiaries, under the Finance Companies Act of 1988.

However, the Central Bank may bend the rule for finance companies whose share capital exceeds one billion rupees, Lanka Rating Agency said Wednesday while assigning an investment grade A2; credit rating for Mercantile Investment’s long-term debt.

Pending this approval, Mercantile Investments has budgeted around 300 million rupees for this exercise, the risk evaluator said.

With 1.41 billion rupees of shareholders’ funds, the company meets with the Central Bank’s minimum capital requirement of 200 million rupees.

“Our analysis indicates that, in the event the subsidiary is formed with the Central Bank’s approval, Mercantile Investment’s capital adequacy ratio would only recede by a mere 80 basis points (i.e. from 26.61 percent to 25.81 percent),” the agency said.

“We are not overly concerned about these developments…. will monitor the company to ensure that the management establishes a firewall to mitigate commingling risk.”

The Company’s Tier-I capital adequacy ratio was 26.61 percent while its risk-weighted capital adequacy ratio was 38.23 percent as at end-December 2005 compared to the required statutory minimums of 5 percent and 10 percent.

The A2 rating, which comes with a stable outlook, is based on Mercantile Investment’s performance, sturdy capitalisation, comfortable funding position, sufficient liquidity and moderate asset quality.

Though profitability has come down over the year, Lanka Ratings say it is above industry average.


Mercantile Investments Ltd

Dec. ’05

Mar. ’05

Industry
Return on Assets 6.08% 7.71% 3.02%
Return on Equity 16.30% 20.63%

The ratings also consider the company’s franchise as a leading finance company in Sri Lanka.

Set up in 1964 as a financier of motor vehicles, Mercantile Investment is currently the third-largest registered finance company in the island, controlling 6.45 percent of the industry’s assets with an asset base of 5.64 billion rupees as at end-December 2005.

Core business lies in accepting public deposits, leasing and hire-purchase activities. Other ancillary business lines include commission income and short-term advances.




Please click to read Lanka Ratings Agency’s views on Mercantile Investments Ltd