Fitch rates Multi Finance sub debt ‘B’

Fitch Ratings Lanka has assigned Multi Finance Company Limited’s (MFCL) unsecured subordinated redeemable debentures of up to Rs. 100 m a National Long-Term ‘B(lka)’ rating.

The proposed debentures will have a maturity of three years with principal repayment as a bullet payment on maturity. However, debenture holders have an early redemption option which can be exercised at any time after two years, and will entitle them to principal and interest accrued up to the redemption date.

Coupon payments will be monthly and at a fixed rate. Proceeds from the debt issue will be used to reduce the maturity mismatch between MFCL’s assets and liabilities.

The debentures are rated a notch below MFCL’s National Long-Term ‘B+(lka), which has a Stable Outlook, reflecting their subordinated status in the capital structure.

MFCL’s rating reflects its small size, weak franchise, and low profitability in its core business.  The rating also factors in the company’s rapid loan growth since its takeover by Entrust Limited (Entrust) in March 2008, and, consequently, improvement in product diversity.  Any significant structural change in MFCL’s balance sheet impeding future profitability could place downward pressure on the rating. Significant and sustained weakening of capitalisation or liquidity may also have a negative rating impact.

Conversely, an increase in MFCL’s scale of operations without significantly compromising asset quality, as well as a sustained improvement in core profitability may result in positive rating action.

MFCL’s total assets stood at Rs. 786 m at end-June 2011 and were 25% funded by deposits, with borrowings from parent funding another 20%.

However, Rs. 157 m of parent company debt was capitalised in September 2011, which should strengthen the company’s capital ratios.  MFCL was established as a registered finance company in 1974. Its shares were listed on the Colombo Stock Exchange in May 2011 in keeping with regulatory requirements and it is 85% held by Entrust Limited.