Fitch asks Merchant Credit to infuse fresh capital; assigns ‘BBB(lka)’ rating

August 01, 2006 (LBO) – Fitch Ratings Lanka Tuesday assigned a ‘BBB (lka)’ to Merchant Credit of Sri Lanka for their long-term debt and said the company should pump in more money to beef up their capital base. With 2.2 billion rupees in assets as at December ’05, Merchant Credit’s ownership is split between Bank of Ceylon (49 percent direct ownership) and the bank’s 49 percent subsidiary Merchant Bank of Sri Lanka. A subsidiary of Bank of Ceylon, Merchant Credit’s core business lies in vehicle financing (90 percent), with the lending to small and medium scale enterprises making up the balance.

Despite a number of constraints, Fitch says it gets comfort from Merchant Credits state-owned ultimate parent, Bank of Ceylon, which has a national rating of AA(lka).

Bank of Ceylon, which controls Merchant Credits immediate parent Merchant Bank of Sri Lanka, in addition to holding a direct stake.

High non-performing loans has (NPL) weakened the company’s credit profile in the 1990s and the firm has since infused new management team to tighten the recovery process.

In Fitch’s opinion, 27 percent of Merchant Credit’s legacy NPLs has very low recoverability.

Competitive pressures and high NPLs have also weakened Merchant Credit’s capital, the risk evaluator said.

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