ICRA Lanka Limited, a wholly-owned subsidiary of ICRA Ltd, a group company of Moody’s Investors Service, has assigned the [SL]A- rating with a stable outlook for the proposed senior unsecured redeemable debenture issue amounting to Rs.5  billion of Commercial Leasing and Finance Company PLC (CLC).
ICRA Lanka also has an issuer rating of [SL]A-(Stable) outstanding on CLC.

Given the significant operational and financial linkages with the holding company (Holdco; Lanka Orix Leasing Company PLC), ICRA Lanka continues to take a consolidated rating view of the Holdco and the key asset financing subsidiaries.

At group level, the rating factors in the LOLC group’s long track record and established position in the retail finance sector, professional and experienced management team and adequate risk management systems with a strong retail franchise.

The rating also derives support from the committed support and oversight from its key investor of the Holdco–ORIX Corporation of Japan (rated Baa2 with stable outlook by Moody’s), which has a 30 percent stake in the entity.

The group’s performance is largely dependent on its key financial service subsidiaries due to the modest contribution from the non-financial service subsidiaries. At group level it would be important to further improve the overall asset quality of the key financial services subsidiaries, by controlling incremental slippages and focused recovery initiatives going forward.

CLC’s liquidity profile is expected to remain comfortable, notwithstanding the gaps observed in the short-term buckets, in the recent past. The company has a good asset quality profile as compared to most peers; ability of the company to restrict incremental slippages would be a key rating sensitivity from a credit perspective.

During 9MFY2015 CLC acquired about 59 percent of BRAC Lanka Finance PLC (BRAC) directly and acquired additional 35 percent from LOLC Micro Investments Limited, a group company; thus giving CLC an ownership of 94 percent of BRAC as in December 14 and subsequently made a mandatory offer to acquire all remaining shares of BRAC.

The acquisition has not impacted the financial risk profile of the company. CLC’s capitalization levels remained strong with Regulatory Total Capital Adequacy Ratio reported at 22.5 percent (Tier-I at 25.3 percent) and gearing at 2.73 times as in December 14.

CLC’s shorter term ALM (Asset-Liability Maturity) mismatches had widened during 9MFY2015. The main reason for this is the accelerated pace of mobilizing fixed deposits (mostly shorter term). ICRA Lanka however takes note of the good renewal rates of around 60 percent of the fixed deposits and, further the proposed debenture issue is likely to temper the mismatches as business growth is expected to remain moderate in the next three to six months.