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According to the Fitch report dated 28/2/2011 LOLC has been downgraded from A(lka) to A-(lka). At the same time Lanka Orix Finance Company (LOFC) has been graded as A-(lka). There report as follows.
Fitch Downgrades Lanka ORIX Leasing Company to 'A-(lka)'; Outlook Negative
Fitch Ratings-Colombo/Mumbai/Singapore-28 February 2011: Fitch Ratings Lanka has downgraded Lanka ORIX Leasing Company PLC's (LOLC) National Long-term rating to 'A- (lka)' from 'A(lka)' with a Negative Outlook. At the same time, the agency has assigned LOLC's proposed senior debentures of upto LKR750m a National rating of 'A-(lka)'. Fitch has also downgraded LOLC's proposed commercial paper's National short-term rating to 'F2(lka)' from 'F1(lka) and simultaneously withdrawn the rating as the issuance is no longer expected to proceed as previously envisaged.
The downgrade reflects the weakening of LOLC's risk profile due to significant debt funded
equity investments in group companies, as indicated by double leverage (measured as equity
investments in group companies/own equity) which increased to 166% at Q311. Further,
LOLC's ongoing transition to a holding company (HoldCo) structure over the medium term
increases the structural subordination for the HoldCo's creditors, whereby it would have to rely
on cash flows from investments to service obligations. In the agency's view, any meaningful
cash flows from investments, at least in the near term, will likely be largely limited to its key
financial-services subsidiaries Lanka ORIX Finance Company Ltd (LOFIN, rated 'A-
(lka)'/Negative, 100% ownership), and Commercial Leasing Company Ltd (CLC, rated A-
(lka)/Stable, 100% ownership), both of which are subject to regulatory restrictions.
The 'A-(lka)' rating also factors in the company's commitment to materially reducing its
indebtedness through selective divestments of some of its investment portfolio over the near
term.
The Negative Outlook indicates that LOLC's rating could be downgraded further if the planned
reduction in double leverage fails to materialise, or, upon achieving a HoldCo structure, if
leverage is not reduced to a level that can be comfortably serviced by sustainable cash flows
from its investments, and a debt maturity profile and capital structure appropriate for an
investment holding company is not achieved. Fitch notes that there is no track record of equity
infusion at the HoldCo-level to fund investments in group companies although dividends have
not been declared for FY09 and FY10. The agency also notes that some of the subsidiaries may
need capital infusion to fund expansions. Fitch further notes that future divestments of
investments are subject to market risk at the point of exit. LOLC's ratings could also come
under pressure if the financial profile of its key subsidiary LOFIN deteriorated (LOFIN's
National Long-term rating has a Negative Outlook). This is also based on the agency's view
that LOFIN and CLC are two of the HoldCo's key cash generating subsidiaries, while most
other investments are in a growth phase, or are otherwise limited in their cash distributions to
the HoldCo.
LOLC continues to have strong access to funding from foreign funding agencies in the group's
core business of SME finance. Foreign credit lines accounted for 25% of borrowings at Q311.
Furthermore, LOLC has developed a strong retail deposit franchise over the past few years,
through its registered finance company LOFIN, improving its funding diversity further. The
proposed senior debenture issuance is to be used to fund LOLC's business expansion and
investments.
Established in 1980, LOLC was Sri Lanka's pioneer specialised leasing company. LOLC is
listed on the Colombo Stock Exchange. LOLC's management expects the transition to a
HoldCo to occur over the medium-term whereby its loan portfolio would continue to contract
with collections spanning over the next few years, or be transferred to financial services
subsidiaries.
http://www.fitchratings.lk/
This does not give any recommendation under any circumstances and this is only what Fitch said.
Fitch Downgrades Lanka ORIX Leasing Company to 'A-(lka)'; Outlook Negative
Fitch Ratings-Colombo/Mumbai/Singapore-28 February 2011: Fitch Ratings Lanka has downgraded Lanka ORIX Leasing Company PLC's (LOLC) National Long-term rating to 'A- (lka)' from 'A(lka)' with a Negative Outlook. At the same time, the agency has assigned LOLC's proposed senior debentures of upto LKR750m a National rating of 'A-(lka)'. Fitch has also downgraded LOLC's proposed commercial paper's National short-term rating to 'F2(lka)' from 'F1(lka) and simultaneously withdrawn the rating as the issuance is no longer expected to proceed as previously envisaged.
The downgrade reflects the weakening of LOLC's risk profile due to significant debt funded
equity investments in group companies, as indicated by double leverage (measured as equity
investments in group companies/own equity) which increased to 166% at Q311. Further,
LOLC's ongoing transition to a holding company (HoldCo) structure over the medium term
increases the structural subordination for the HoldCo's creditors, whereby it would have to rely
on cash flows from investments to service obligations. In the agency's view, any meaningful
cash flows from investments, at least in the near term, will likely be largely limited to its key
financial-services subsidiaries Lanka ORIX Finance Company Ltd (LOFIN, rated 'A-
(lka)'/Negative, 100% ownership), and Commercial Leasing Company Ltd (CLC, rated A-
(lka)/Stable, 100% ownership), both of which are subject to regulatory restrictions.
The 'A-(lka)' rating also factors in the company's commitment to materially reducing its
indebtedness through selective divestments of some of its investment portfolio over the near
term.
The Negative Outlook indicates that LOLC's rating could be downgraded further if the planned
reduction in double leverage fails to materialise, or, upon achieving a HoldCo structure, if
leverage is not reduced to a level that can be comfortably serviced by sustainable cash flows
from its investments, and a debt maturity profile and capital structure appropriate for an
investment holding company is not achieved. Fitch notes that there is no track record of equity
infusion at the HoldCo-level to fund investments in group companies although dividends have
not been declared for FY09 and FY10. The agency also notes that some of the subsidiaries may
need capital infusion to fund expansions. Fitch further notes that future divestments of
investments are subject to market risk at the point of exit. LOLC's ratings could also come
under pressure if the financial profile of its key subsidiary LOFIN deteriorated (LOFIN's
National Long-term rating has a Negative Outlook). This is also based on the agency's view
that LOFIN and CLC are two of the HoldCo's key cash generating subsidiaries, while most
other investments are in a growth phase, or are otherwise limited in their cash distributions to
the HoldCo.
LOLC continues to have strong access to funding from foreign funding agencies in the group's
core business of SME finance. Foreign credit lines accounted for 25% of borrowings at Q311.
Furthermore, LOLC has developed a strong retail deposit franchise over the past few years,
through its registered finance company LOFIN, improving its funding diversity further. The
proposed senior debenture issuance is to be used to fund LOLC's business expansion and
investments.
Established in 1980, LOLC was Sri Lanka's pioneer specialised leasing company. LOLC is
listed on the Colombo Stock Exchange. LOLC's management expects the transition to a
HoldCo to occur over the medium-term whereby its loan portfolio would continue to contract
with collections spanning over the next few years, or be transferred to financial services
subsidiaries.
http://www.fitchratings.lk/
This does not give any recommendation under any circumstances and this is only what Fitch said.
