People’s Leasing goes for Rs. 2 b Commercial Paper issue

Fitch Ratings Lanka has assigned People’s Leasing and Finance Company PLC’s (PLFP, ‘B+’/’AA-(lka)’/Stable) proposed issue of commercial paper of up to Rs. 2 billion a National Short-Term ‘F1+(lka)’ rating. A full list of PLFP’s ratings is provided at the end of this commentary.

The proposed notes will have a tenure of up to one year, and will be used to finance the company’s working capital requirements.

PLFP’s ratings reflect the capacity and willingness of its State-owned parent People’s Bank (PB, ‘AA+(lka)/Stable, 75% ownership) to extend extraordinary support to PLFP in times of distress. This is in turn driven by PLFP’s strong association with PB’s brand and its strategic importance to PB.

PB’s capacity to support PLFP is in turn derived from the financial capacity and propensity of the Government of Sri Lanka (‘BB-’/Stable), given the bank’s increasing role in Sri Lanka’s post-war economic development and its high systemic importance (18% of system assets and deposits in 2011). Fitch believes it is highly likely for Government support to flow through to PLFP via PB due to the reasons mentioned above as well as the potential reputation risk to the Government should PLFP default on its financial obligations.

The two-notch differential between the National Long-Term ratings of PLFP and PB reflect potential administrative difficulties and regulatory restrictions (such as maximum single party exposures) that exist between the companies which could impede the flow of Government support to PLFP. Such impediments are usually observed in layered support structures.

Changes to PB’s ratings may result in corresponding changes to PLFP’s ratings, provided that the linkages between PB and PLFP remain intact. PLFP’s ratings may be downgraded if PB gives up its controlling stake, or if its strategic importance to PB diminishes over time.

PLFP is the largest non-bank financial institution in Sri Lanka by advances, with a 21% share of the market at end-2011. At end-June 2012, its total assets and post-tax profits stood at Rs. 96 b and Rs. 720 m respectively.