ICRA Lanka assigns [SL]A- rating with stable outlook to First Capital Holdings

ICRA Lanka Ltd., a wholly-owned subsidiary of ICRA Ltd., a group company of Moody’s Investors Service has assigned the Issuer rating of [SL]A- (pronounced SL A minus) with a stable outlook to First Capital Holdings PLC (FCH or the company). 

ICRA Lanka has assigned the [SL]A- (pronounced SL A minus) rating to the Rs. 500 m Senior Unsecured Redeemable Debenture program of the company. ICRA Lanka has assigned the [SL]A2+ (pronounced SL A two plus) rating to the Rs. 1,000 m Commercial Paper program of FCH.

ICRA Lanka has taken a consolidated view of FCH and its subsidiaries due to their common brand and senior management team and, other operational and financial linkages between the group entities. 

The ratings factor in the FCH’s status as the holding company of First Capital Treasuries Ltd. (FCTL, a standalone Primary Dealer in Sri Lanka with Issuer Rating of [SL]A- with stable outlook). The ratings take note of the improvement in the business and financial performances of the other group entities, which are engaged in corporate debt structuring, corporate finance, asset management, stock broking and in extending margin trading facilities, over the recent past. 

ICRA Lanka however notes that FCH’s performance is largely dependent on performance of FCTL, as the contribution from the other entities presently is quite modest. FCTL accounted for about 80% of the total consolidated asset base of FCH and about 70% of its consolidated profit before tax for FY2015. Thus, FCH’s performance is expected to be susceptible to the risks inherent in the primary dealer business. 

The above mentioned risk however is likely to be moderated by the prudent internal control and processes, along with the adequate risk management systems put in place for FCTL. The FCH group has an established clientele of over 2,500, which is expected to support the business growth of the other group entities. ICRA Lanka takes cognisance of the comfortable liquidity position of the FCH group given the highly liquid assets and the sanctioned credit facilities from banks with the group entities.

FCH, being a holding company derives its income from the dividends from the group entities and income from its investments, which includes interest income and profit from investments. During FY2015, income from investments accounted for about 60% of the total income of FCH (Standalone), while dividend income contributed to the rest vis-à-vis 84% of income from dividends in the previous financial year. 

The increase in the investment income in FY2015 could be attributed to the one-time gain of about Rs. 233 m following the reclassification of its investment in Orient Finance PLC, which was subsequently sold in June 2015.The company’s standalone performance is largely linked to the dividend income from its principal subsidiary, FCTL and, investment income.

The expected moderation in the performance of FCTL in FY2016 vis-à-vis FY2015, is likely to impact the overall performance of FCH. The company’s funding profile is characterised largely by short term funding, which accounted for close to 80% of the total standalone debt in March 2015, while the remaining was in the form of long term debentures. FCH’s asset profile (Standalone) largely consists of short term loans funding to its group entities. 

The company’s standalone gearing stood moderately high at about 3.4 times as in March 2015; however the FCH group access to the sanctioned bank lines and its liquid assets provides comfort from a liquidity

perspective.

ICRA takes note of the improvement in the performance of the other subsidiaries in the group. First Capital Ltd., which is 99.9% held by FCH, is involved in corporate debt structuring, corporate finance and advisory services. 

FCL witnessed an improvement in the performance due to increase in the fee based income (increased to Rs. 127 m in FY2015 as compared to Rs. 12 m in FY2014) arising from above mentioned services offered, however profitability continues to be driven by the dividend income from the principle subsidiary, FCTL, which accounted for close to 50% of the total income of about Rs. 1.1 b, while the remaining was contributed by interest income on its investments. 

FCL is the step-down holding company for the other entities in the FCH group including FCTL; First Capital Asset Management Ltd. (FCAML) that is involved in portfolio management; First Capital Markets Limited (FCML) that is involved in providing margin trading facilities and First Capital Equities Ltd. (FCEL) which is engaged in stock broking activities. 

FCAML, FCML and FCEL together accounted for about 6% of the FCH consolidated income and about 2% of the consolidated profit before tax. ICRA Lanka takes note the improvement in the business volumes in the above mentioned entities during FY2015, which supported the financial performances. 

FCML and FECL reported profits for FY2015 vis-à-vis losses in the previous financial year, while the FCAML was profitable and its financial performance has remained largely range bound over the last few years.