Fitch removes ‘Rating Watch Evolving’ on Abans Finance

Fitch Ratings said yesterday it has placed the Outlook on Sri Lanka-based Abans Finance PLC’s National Long-Term Rating on Rating Outlook Evolving and has affirmed the rating at ‘A(lka)’. Fitch has removed the rating from Rating Watch Evolving (RWE).

Fitch said Abans Finance announced on 10 August that its proposed sale to Softlogic Capital PLC (SCAP) is no longer being pursued. The announcement has resulted in Fitch removing the RWE that it placed on Abans Finance’s rating on 7 October 2020, after the company announced on the Colombo Stock Exchange on 29 September 2020 that SCAP would acquire 49.67% of Abans Finance from Abans PLC (AA(lka)/Stable) – Abans Finance’s parent – then amalgamate with SCAP’s majority-owned Softlogic Finance PLC. 

However, Fitch has now placed the Outlook on the company’s rating to Outlook Evolving to reflect the uncertainties around the potential for a disposal of Abans Finance by Abans group, which affects the assessment of Abans’ propensity to extend extraordinary support to its subsidiary. 

“We believe the parent’s intention to dispose of Abans Finance is evident from its proposed transaction with SCAP, although now abandoned, and its classification of the subsidiary as ‘Held for sale and discontinued operation’ in its financial statements,” Fitch said. 

The parent’s stake in the finance company has also been diluted to 50%, from 89% in the financial year ending March 2016, due to capital infusions to meet regulatory requirements, which were mostly via its private-equity investor, Ironwood Investment Holdings Ltd. 

“Abans Finance is required to further raise its core capital to Rs. 2.5 billion by end-2021 (end-June 2021: Rs. 2 billion) and we believe that retained earnings alone will be insufficient to reach this level,” Fitch stated.  The Central Bank of Sri Lanka (CBSL), as a part of its financial-sector consolidation plan, has been pursuing finance company sales and mergers to avoid further deterioration of the financial positions of licensed finance companies in Sri Lanka. 

Fitch expects to resolve the Rating Outlook Evolving once it has greater clarity of the parent’s propensity to support Abans Finance. This could be signalled through, for instance, a capital infusion from Abans towards meeting its subsidiary’s higher minimum absolute regulatory capital requirement. 

“The rating affirmation reflects that we continue to factor in parental support for Abans Finance, despite its limited importance to the parent, as Abans is still its largest shareholder and is involved in its strategic decisions through board representation and a common brand name. However, we rate Abans Finance three notches below its parent due to its limited role in the group and the parent’s decreased shareholding. 

Abans Finance’s intrinsic financial strength is significantly weaker than its support-driven rating due to its small franchise, limited operating history and high-risk appetite,” Fitch stated.