Fitch Ratings has downgraded Singer Finance (Lanka) PLC’s (SFL) National Long-Term Rating to ‘A(lka)’ from ‘A+(lka)’. The Outlook is Negative. The agency has also downgraded SFL’s outstanding senior unsecured debt to ‘A(lka)’ from ‘A+(lka)’, and its outstanding subordinated unsecured debentures to ‘BBB+(lka)’ from ‘A-(lka)’.
KEY RATING DRIVERS NATIONAL RATING
The downgrade on SFL’s rating is driven by similar rating action on its parent, consumerdurable retailer Singer (Sri Lanka) PLC (Singer, AA-(lka)/Negative), on 26 January 2022 as SFL’s rating reflects Fitch’s expectation of support from Singer. Our expectation is based on Singer’s 80% shareholding in SFL, a common brand name, a record of equity injections into SFL and the parent’s strategy to improve the subsidiary’s prospects in the medium-to-long term. However, we regard SFL to be of limited importance to Singer due to its low contribution to the group’s core business and negligible synergies, evident from SFL’s small share of lending within the group’s ecosystem.
We also believe support from the parent could be constrained by SFL’s significant size relative to Singer, as its assets represented 33% of group assets at end-September 2021. SFL’s operational integration with the group is also low, although the parent has increased its focus on the subsidiary’s strategic long-term decision-making over the past few years and has meaningful representation on SFL’s board. SFL’s intrinsic financial position is weaker than its support-driven rating.
It has a small domestic vehicle-focused lending franchise and a high-risk appetite stemming from its exposure to customer segments that are more susceptible to difficult operating conditions. SFL’s performance remains pressured by the more challenging operating environment caused by the Covid-19 pandemic. Asset quality has deteriorated, with its reported regulatory six-month non-performing loan ratio rising to 8.7% by end-September 2021 from 6.9% in March 2021 and 6.4% in September 2020, although it is still better than that of other similarly sized finance and leasing companies. Profitability, measured by pretax income/average assets, deteriorated to 3.6% in the first half of the financial year ending March 2022 (FY22) from 4.2% in FY20 due to higher loan impairment charges.
SFL improved its share of deposits to 58% of total borrowings by end-September 2021 from 45% at end-September 2020, and continues to focus on improving its deposit franchise. Debt/tangible equity rose to 5x by end-September 2021, from 4.4x at end- March 2020. Sustained strong loan expansion in the medium term could add pressure to SFL’s leverage. SENIOR UNSECURED DEBT The rating on SFL’s senior unsecured debt is in line with its National Long-Term Ratings, as the debt constitutes unsubordinated obligations of the company.
SUBORDINATED UNSECURED DEBT
SFL’s Sri Lankan rupee-denominated subordinated debentures are rated two notches below its National Long-Term Rating to reflect their subordination to senior unsecured obligations. Fitch’s baseline notching of two notches for loss severity reflects our expectation of poor recovery. There is no additional notching for non-performance risk.
Factors that could, individually or collectively, lead to positive rating action/upgrade: An upgrade of Singer’s rating and Outlook revision to Stable could result in positive rating action on SFL’s National Long-Term Rating, but we do not expect this in the current environment. A rating upgrade could also result from a significant increase in SFL’s strategic importance to its parent through a greater role within the group.
Factors that could, individually or collectively, lead to negative rating action/downgrade: SFL’s National Long-Term Rating could be downgraded further if Singer’s ability to support SFL were to weaken, which would be signaled through a downgrade of Singer’s National Long-Term Rating. Overly aggressive growth at SFL or a deterioration in its financial profile, which leads to further need for Singer to provide capital support beyond Fitch’s expectation that weighs on the parent’s ability to support, could lead to wider notching between their ratings.
Any perceived weakening in Singer’s propensity to support SFL could also be negative for SFL’s rating. This could arise from weaker links with the parent that result in wider notching, which may be triggered by a decline in parental control or weak performance at SFL that raises questions over the business’s long-term viability. DEBT RATING SFL’s senior unsecured debt and subordinated unsecured debt ratings will move in tandem with the National Long-Term Rating.