Fitch affirms Melsta Regal Finance at ‘A+’; Outlook Stable
Thursday, 22 May 2014 01:30
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Fitch Ratings has affirmed Melsta Regal Finance Ltd.’s (MRF) National Long-Term rating at ‘A+(lka)’. The Outlook is Stable.
Key rating drivers
MRF’s rating reflects Fitch’s expectation that support would be forthcoming from its ultimate parent, the Distilleries Company of Sri Lanka PLC (DIST; AAA(lka)/Stable). Fitch classifies MRF as being of limited importance to DIST, which results in a rating differential of four notches.
The agency’s assessment is based on DIST’s full effective ownership of MRF through its 100% stake in investment holding company Melstacorp Limited, which holds all non-beverage sector assets of the group. It addition, DIST has representation on MRF’s board, and has demonstrated support in the form of regular equity infusions, a back-up credit line and the provision of letters of comfort for borrowings. The assessment however, also reflects MRF’s still insignificant role in the group, the low level of operational integration, the absence of a common brand and relatively small contribution to group profit (0.6% in the nine months ending December 2013.
Fitch is of the view that linkages between the entities could increase over the medium term as MRF, a licensed finance company, increases its scale through actively taking part in the financial sector consolidation. The authorities also require MRF to increase its capital base to Rs. 1.5 b by end-2017 (Rs. 1.1 b at end March 2014). In addition MRF is required to list by end-2014 with an expected public shareholding of around 20%. Fitch believes that DIST will continue to retain a majority stake. MRF has expanded quickly since it started commercial operations in October 2012 as part of DIST group and Fitch expects that it will continue to growth rapidly. Short-term debt factoring and working capital finance remain MRF’s core products, accounting for approximately 60% of advances in the financial year ending March 2014, with the remainder comprising mainly finance leases and hire purchase vehicle finance. DIST’s ability to support MRF stems from its market leadership in the cash generative domestic alcoholic beverage sector, with profitability supported by relatively stable demand for spirits though economic cycles, and high entry barriers as a result of regulation.
Rating sensitivities
MRF’s rating may be downgraded if there is a change to DIST’s ability or propensity to provide support. This may stem from a downgrade of DIST’s National Long-Term rating, or weakening linkages between DIST and MRF. Fitch may consider narrowing the notching between the two entities should synergies, such as the provision of working capital products to DIST’s suppliers and customers, materialise, thereby enhancing its role within the group. In addition, an increase in MRF’s strategic importance through stronger linkages with the DIST group, higher profit contribution or common brand recognition could lead to an upgrade.
