Fitch affirms Central Finance at ‘A+’, rates debenture
Sunday, 17 November 2013 00:01
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Fitch Ratings Lanka has affirmed Central Finance Company PLC’s (CF) National Long-Term Rating at ‘A+(lka)’ and assigned its proposed listed senior secured debenture of up to Rs. 2 billion an expected National Long-term Rating of ‘A+(lka)(EXP)’. The Outlook is Stable. Fitch has also affirmed CF’s senior unsecured debt at ‘A+(lka)’ and subordinated debt at ‘A(lka)’.
The proposed issuance is expected to have a tenor of between three and five years, with a fixed-rate coupon. CF expects to use the proceeds to fund lending growth. The final rating on the debenture is subject to the receipt of final documentation conforming to information already received.
Key rating drivers
CF’s rating reflects its high capitalisation, which should continue to mitigate the pressure on loan quality and its low provisioning levels. The rating also captures its robust profitability relative to its peers. CF’s solid deposit franchise, developed over its long operating history, supports its margins as it provides access to relatively cheaper funding.
The proposed senior secured debenture is rated in line with CF’s National Long-Term Rating. The debenture is secured by a primary mortgage over receivables from identified hire-purchase and lease agreements.
It will be omitted from the enhanced statutory liquid assets requirement for Licensed Finance Companies applicable in 2014. This is in contrast to unsecured borrowings for which CF will need to post a 5% minimum reserve with the Central Bank if it is not included in capital funds of the company.
Fitch has not provided any rating uplift for the collateralisation as the secured notes’ recovery prospects are assessed as being average and comparable to those of the unsecured notes in a developing legal system.
CF has historically maintained high capitalisation stemming from good profitability and high capital retention. The consolidated Fitch core capital (FCC) ratio stood at a high 32.7% at end-June 2013 (end-March 2013: 35.3%) in relation to that of peers.
It differs from the unconsolidated regulatory Tier 1 ratio of 23.1% as FCC captures a larger portion of retained earnings and revaluation reserves. In addition FCC is derived from balance sheet equity and as such reflects lower loan impairment charges in line with accounting rules.
CF’s strong capitalisation mitigates the rise in non-performing loans (loans 90 days overdue and including interest in suspense) and the low provision coverage.
As a result, the ratio of unprovided NPLs to equity has remained comparable to peers. Unprovided NPLs increased to 23% of equity at end-June 2013 (end-March 2013: 19.5%) mainly because CF’s provisioning coverage - the ratio of impairment reserves to gross loans - is well below peers’ at 0.7% as at end-June 2013 in Q1FY14 (end-March 2013: 0.6%).
The deterioration in NPLs to 9.9% of gross loans at end-June 2013 (end-March 2013: 8.3%, end-March 2012: 4.9%) was partly due to exposures to the agriculture and construction sectors, which have been adversely affected by poor weather and low business activity, respectively.
Liquidity remains sufficient due to CF’s solid deposit franchise, low bank borrowings and sufficient unutilised credit lines to fund its maturity mismatches.
Deposits funded 50% of CF’s assets in 1QFY14 (quarter ending June 2013) and remained fairly granular.
Rating sensitivities
Greater product diversity, together with improved funding flexibility commensurate with higher-rated peers, could lead to an upgrade. However, taking into account the current pressure on its asset quality, Fitch does not see an upgrade as likely in the medium term.
CF’s rating could be downgraded if it is not able to provide a buffer against further loan quality deterioration through profit, which would lead to an increase in unprovided NPLs relative to equity.
The debt ratings will move in tandem with CF’s National Long-Term Rating.
CF is a Licensed Finance Company established in 1957. It is 21.9% held by the Wijenaike family - the founders of the company, 16.1% owned by Corporate Services Ltd., and the rest is held by the public.
