LOLC’S investment appetite for market-risk instruments rises : Fitch

Fitch Ratings has downgraded Lanka ORIX Leasing Company PLC'S (LOLC – holding company) National Long-term rating to 'Bbb+(lka)' from ' A( lka) with a negative outlook.

The agency also downgraded LOLC'S outstanding Rs 1.25 billion senior Unsecured redeemable debentures due in 2015, to 'Bbb+(lka)' from 'A-(lka)'.

“The downgrade reflects LOLC'S higher appetite for market risks at the company as demonstrated by the increase in debt-funded group- and trading-equity investments to an estimated Rs 11.7 billion during the 12 months to 31 December 2011 (31 December 2010: Rs 7.1 billion),” the statement said.

As a result, financial leverage at LOLC ( net debt/cash operating profit from recurring sources before interest expenses) increased to 14.5x at FYE11 (FYE10: 10.2x), it said.

LOLC has confirmed that a number of measures were taken as at 27 February 2012 which it expects will reduce debt-funded investments at the holding company to reduce to an estimated Rs 5.6 billion. “However it is the agency's view that, LOLC has not demonstrated its sustained ability/willingness to maintain a capital structure and debt maturity profile in line with a higher rating, and that the company could resort to debt-financing a considerable proportion of future acquisitions or expansions,” it said.

Fitch said the ‘negative outlook; reflects the uncertainty surrounding LOLC'S strategy of funding future investments and expansions of the group, and its implications on holding company creditors.

“As LOLC is progressing towards a holding company structure, the company will increasingly have to rely on cash (in the form of dividends and fees) from operating subsidiaries for timely repayment of its own obligations. However, most of its key subsidiaries are experiencing rapid asset growth or are otherwise limited in their ability to pay out adequate dividends and fees to the holding company over the mediumterm.”

Meanwhile the rating agency said it affirmed Lanka ORIX Finance Plc's (LOFIN) National LongTerm rating at 'A-(lka with the outlook still negative.

This is because of the heightened risk profile of LOFIN'S parent - Lanka ORIX Leasing Company Plc (LOLC; ' Bbb+(lka)'/negative).

LOFIN'S franchise remains linked to that of LOLC, and as one of the main operating subsidiaries of the group, its strategic and operational ties with LOLC remain intact.

“Consequently, a further deterioration of LOLC'S financial profile may result in a downgrade of LOFIN'S rating. A deterioration of LOFIN'S financial profile, particularly in terms of its capitalisation, may also result in a downgrade. A significant reduction in risk stemming from the holding company may result in a revision of the Outlook to Stable,” the statement added.

LOLC injected capital of Rs 1 billion into LOFIN in Q3FY11. However, the strong increase in assets resulted in equity/assets decreasing to 12.0% at 9MFY12 ( nine months ended 31 December 2011) from 14.5% at FYE11.