ICRA Lanka assigns [SL]A- with stable outlook to Commercial Leasing, Finance Company

ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd., an associate of Moody's Investors Service, has assigned an Issuer rating of '[SL] A-' (pronounced SL A minus)1 with stable outlook to Commercial Leasing and Finance Limited (CLC or the Company). The rating indicates adequate-credit-quality and the rated entity carries average credit risk. The rating in Sri Lanka is assigned on an eight-point scale developed specifically for the country, and ranges from '[SL] AAA' to '[SL] D'. This rating scale ranks the relative default risk associated with issuers in Sri Lanka.

The rating factors the operational and financial linkages with the LOLC Group2 in its position as a strategic finance company of Lanka ORIX Leasing Company PLC (HoldCo), which is rated [SL]A-/stable by ICRA Lanka. Given this, ICRA Lanka has taken a consolidated rating view of the HoldCo and its key asset financing subsidiaries considering the HoldCo or the Group could rely on the key financial services subsidiaries for support. The rating takes into account the demonstrated track record of operating profitably in the retail finance segment, well established franchise combined with a professional and experienced management team and comfortable capitalization levels.

The rating draws comfort from the good overall asset quality maintained despite the recent increase in slippages in its factoring book and the current adequate liquidity position supported by limited asset liability mismatch.

CLC's main product lines are Leasing, hire purchase, loans (88% of total Portfolio as at Mar-12) and factoring (12%). CLC operates with an Agent/business introducer based outsourcing model where 70% of its sourcing is carried out through this network whilst the remaining 30% is direct business.

Asset quality (Gross NPAs) has remained superior to industry levels at 2.78% as at Mar-12 however registering deterioration from 1.82% recorded as at Mar-11 mainly due to weaker asset quality registered in the factoring portfolio. ICRA also notes that the CLC's factoring book carries a high concentration risk with the 10 largest factoring clients accounting for more than 25% of net worth. Gross NPA levels in the core lending businesses (other than factoring) have improved to 1.29% (FYE Mar-12) from 1.78% (FYE Mar-11).

Capitalization levels remain comfortable as at Mar-12 with Net Worth to Total Assets Ratio at 25% (Mar-11-17%) and Regulatory Total Capital Adequacy Ratio at 25.60%. Capitalization was boosted by the Rs. 2.0 billion gain recorded on the sale of investment in Diriya Investments Ltd to LOLC Investments Limited, coupled with the equity infusion of Rs 1bn from the Parent, Lanka ORIX Leasing Company PLC (LOLC) in FYE Mar-11.