Fitch doubts parents’ ability to support finance company subsidiaries in current economic downturn

Local finance companies, which are subsidiaries of parent companies, could face headwinds in the current economic downturn as Fitch Ratings cast doubts over the latter’s ability to provide timely support in times of stress. 

The rating agency last week downgraded one finance company due to heightened stress on its parent and placed four other finance companies under Rating Watch Negative (RWN) due to potentially weaker ability of their parents to provide them with liquidity support should there be a liquidity crunch in the financial system. 

Fitch Ratings downgraded Singer Finance Lanka PLC by a notch to A- from A and placed its outlook to RWN as Singer (Sri Lanka) PLC is facing heightened pressure on their cash flows and leverage as the consumer durables juggernaut is under pressure from, “continued weakening in operating conditions including rising inflation and interest rates, weakening demand on deteriorating disposable incomes, and challenges in importing finished goods for resale”. 

Due to these conditions, Fitch downgraded Singer (Sri Lanka) to A+ on April 29 from AA- keeping the Negative rating outlook.  Sri Lankan busineses, irrespective of their industries, are affected by the stresses stemming from the elevated macro-economic challenges coming from the country’s economic hard landing, which has sent prices through the roof and pushed people into poverty.  

These conditions, according to Fitch, would exert enormous pressure on Singer (Sri Lanka) to provide its finance subsidiary with potential capital support for the latter to maintain adequate capital buffers. 

While there was a requirement for an additional Rs.9.0 billion in debt at the parent company level to support its finance company, Fitch now estimates that requirement to go up to Rs.12 billion by FY25 amid the subsidiary’s loan growth.  Consumer durables are worst-hit when the economy sank as people struggle heavily to make even their ends meet amid soaring inflation, let alone buying electrical appliances.  In the three months to March 2022, Singer Finance Lanka PLC reported earnings of Rs.200.8 million compared to Rs.149.6 million in the year earlier period but saw its provisions for possible bad loans soaring to Rs.33.6 million from just Rs.2.5 million a year ago. 

Singer (Sri Lanka) has 79.93 percent stake in Singer Finance. Meanwhile, Fitch placed ratings of Abans Finance PLC, AMW Capital Leasing and Finance PLC and Richard Pieris Finance Limited on RWN as the rating agency expects the abilities of their parents to become weaker to provide them with liquidity support should there by a liquidity crunch in the system.  “We believe these entities, similar to other peers in the sector, are prone to the risk of a change in creditor and market sentiment due to their high deposit concentration and significant reliance on wholesale funding,” Fitch said.  “This, in turn, could put pressure on their parents to provide timely liquidity support, which is likely to be challenging in the weak operating environment and the stresses building up in the banking system,” it added.