Mar 01, 2011 (LBO) – Sri Lanka’s Lanka Orix Leasing Company has been downgraded by one notch to ‘A-(lka)’ by Fitch Ratings, with a ‘negative’ outlook on higher debt funded equity investments in group firms. Fitch said it had also downgraded an LOLC’s proposed commercial paper to ‘F2(lka)’ from ‘F(lka)’ and withdrawn the rating.

“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 percent at Q311 (third quarter of the 2011 financial year),” Fitch Ratings said.

“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 its 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 percent ownership), and Commercial Leasing Company Ltd (CLC, rated