ICRA upgrades rating on Vallibel Finance Rs. 1.5 b debentures

ICRA Lanka Ltd. has upgraded Vallibel Finance PLC’s (VFP) rating of Rs. 500 million unsecured subordinated redeemable debentures, upgraded to BB+ with a stable outlook from BB+ previously.

Concurrently the issue rating of Rs. 1000 million guaranteed subordinated redeemable debentures is upgraded to AA-(SO)  from AA(bg).

The upgrade is premised on the strength and strong backing from the second largest bank in the country in terms of assets, Hatton National Bank (HNB) that is covering the principal and two semi annual interest instalments and, the undertaking from the trustee to declare the entire guaranteed amount as payable in the event the issuer does not redeem the debenture in full.

Therefore HNB will undertake the responsibility to pay Rs. 1.1 billion on demand from the trustee which is the total principal sum and two half yearly interest instalments of the proposed guaranteed subordinated redeemable debentures. The ICRA rating also assumes that HNB will be duly invoked by the trustee in case there is a default in payment by Vallibel Finance.

The rating agency has also taken note of the stable financial and managerial support from the Vallibel group of companies. The company had managed to maintain a reasonable asset quality profile while recording a non performing asset (NPA) ratio of 4.3% as at December 2015 alongside good profitability indicators indicating an increase of 32.5% on return on net worth (RoNW).

The rating however highlighted the highly competitive business environment in VFP’s target product segment, which revolves around cars and vans. Exposure to customers with moderate credit profile, its high dependence on debt resulting in a gearing ratio level of 10.0 times in December 2015 and reliance on deposits are other areas cautiously noted by ICRA.

According to ICRA Vallibel finance keeping asset quality under control and maintaining a conservative capital structure as it increases its exposure to newer products, is crucial for VFP to hit the growth target of 30%-40% in FY16.