Fitch assigns Commercial Leasing’s proposed Senior Unsecured Debt ‘A-(lka)’

Fitch Ratings has assigned Commercial Leasing Company Ltd’s (CLC) proposed Rs. 700m senior unsecured debenture issue a National Long-term rating of ‘A-(lka)’. CLC’s National Long-term rating is ‘A-(lka)’. The outlook is stable.

The ratings reflect the expectation that support would be forthcoming from CLC’s parent, Lanka ORIX Leasing Company PLC (LOLC; ‘A(lka)’/Stable), as well as CLC’s fairly strong financial profile and good asset quality. LOLC purchased a 97 percent stake in CLC in mid-2008, and after acquiring the remainder in 2009, de-listed the company from the Colombo Stock Exchange.

While there has been some integration of core operations since the acquisition, such as treasury and certain back office functions, the two companies will continue to operate as separate entities, benefiting from strong brand franchises in their respective customer segments. CLC is strategically important to LOLC as an important contributor to the group’s profits (9M10: 44 percent) and in the broadening of the LOLC group’s customer base.

CLC’s disbursements increased in the latter half of 2009 and the company registered a loan growth of 17 percent at FYE10. It was driven by the growth across CLC’s entire lending portfolio except for leasing which contracted during the period. Lease and hire purchase together accounted for 76 percent of total advances, and is mainly for individuals in the SME segment for the purchase of commercial vehicles; the remainder comprised of working capital loans secured by vehicle mortgages (9 percent of advances) and debt factoring (15 percent).

Loan quality continued to be managed well in FY10, with nominal non-performing loans (NPLs) decreasing by 30 percent from its peak in mid 2009, supported by closer monitoring and aggressive recovery processes.

Despite wider margins and lower provisioning costs in FY10, CLC’s profitability declined marginally due to higher operating costs. CLC’s operating costs/average assets increased to 5.6 percent in FY10 (15M09: 4.7 percent), driven by higher costs allocated by the LOLC head office for various staff and administration expenses.

CLC is a specialised leasing company, involved in hire purchase and debt factoring. It has 17 branches and 11 service and owns a 40 percent stake in an insurance broking company, Commercial Insurance Brokers, and a 50 percent stake in Diriya Investments Ltd, an equity investment company.