Fitch Lanka affirms PLC ratings

Fitch Ratings Lanka Ltd has affirmed the following ratings on People’s Leasing Company Limited (PLC), consequent to the announcement of its possible takeover of Seylan Merchant Leasing Plc (SML).

The affirmed ratings are as follows:

National long-term rating at ‘A-(lka)’ (A minus(lka), National long-term rating on proposed subordinated debenture issue at ‘BBB+(lka)’, and National short-term rating on LKR 75m outstanding short-term debentures at ‘F1(lka)’.

The outlook of PLC’s National long-term ratings remains Stable.

At the same time, Fitch has placed SML’s ‘BB+(lka)’ National Long-term rating on Rating Watch Positive (RWP).

The RWP indicates that SML’s rating could potentially be upgraded or affirmed if PLC were to acquire a controlling stake from SML’s majority shareholder, Seylan Merchant Bank Plc (SMB, with an 84 per cent ownership).

The RWP is based on Fitch’s view that SML is likely to benefit from PLC’s support post-acquisition, given the strategic importance of SML’s registered finance company license to PLC. This license will enable PLC to access customer deposit funding, thereby broadening its funding avenues, which is currently dependent upon institutional borrowings.

The affirmation of PLC’s ratings is underpinned by the agency’s expectations that its credit profile is unlikely to be materially affected due to this acquisition. Fitch believes the firm’s stronger financial profile should be able to comfortably absorb SML, which accounted for only 9 per cent of the “consolidated entity” assets.

For instance, even in the highly unlikely event that would require PLC to write off all advances on SML’s books, PLC’s net NPL/Equity ratio is expected to remain comfortable for its current rating at approximately 10 per cent (based on the financial position of both companies at December 31, 2008) compared to 5 per cent on a standalone basis.

The Rating Watch on SML will be resolved once the transaction is concluded or in the event that it is abandoned.

PLC is a specialised leasing company and is wholly owned by People’s Bank of Sri Lanka (‘A-(lka)’ (A minus(lka))/Positive Outlook). The company’s total asset base stood at LKR 25.4 bn at end Dec 08.