Fitch affirms Ceylease and assigns 'BB+(lka)' to proposed
subordinated debt
Fitch Ratings has affirmed the National Long-term rating of Ceylease
Financial Services Ltd (CFSL) at 'BBB-(lka)' (BBB minus(lka)). At the
same time, the agency assigned a National Long-term rating of 'BB+(lka)'
to CFSL's proposed subordinated debenture issue of up to Rs 300m. The
rating Outlook is Stable.
The ratings reflect the implied support deemed to be available to
CFSL through its key shareholder Bank of Ceylon (BoC, rated 'AA(lka)'/Stable
Outlook), which owns 55 percent. The rating is, however, constrained by
CFSL's small scale of operations, its weak profitability and solvency
(as measured by net NPL/equity). Fitch notes that a perceived weakening
in BoC's intention (or ability) to extend support could result in a
downgrade of CFSL's ratings. Meanwhile, the rating on the proposed
subordinated debenture issue reflects the instrument's lower
recoverability in the event of a default, in line with Fitch's
methodology.
CFSL's loan growth has traditionally been slower than that of most
other specialised leasing companies (SLCs) that Fitch rates, driven
largely by its limited reach; the company launched its second branch in
Kandy in late-2007. However, CFSL has had to limit its loan growth
further in FY08 due to its high regulatory gearing ratio (7.74x equity
at FYE08), which was on a trajectory to breach the ceiling of 7.0x that
came into effect in January 2009 (previously 10x).
Fitch notes that CFSL's high gearing is a function of its relatively
low profitability and weak earnings retention in the past. Equity/assets
for other Fitch-rated SLCs stood at 15.74 per cent at FYE08, compared to
11.14 per cent for CFSL.
The agency also observes that while dividends were not drawn out in
FY08 (in contrast to previous years) in a bid to improve gearing, an
equity infusion may still be required. Absolute profit declined in FY08
as incremental business generation was inadequate to cover marginal
costs. Consequently, ROA declined to 0.52 percent at FYE08 from 0.84
percent at FYE07. |
