Fitch Upgrades and Withdraws Ceylease's Rating; Affirms MCSL Financial Services
Fitch Ratings-Colombo-09 September 2013: Fitch Ratings Lanka has upgraded Sri Lanka-based Ceylease Ltd's (CL) National Long-Term Rating to 'BBB(lka)' from 'BB+(lka)', removed it from Rating Watch Positive and withdrawn the rating as the company no longer exists.
This follows the announcement of the merger between MCSL Financial Services Limited's (MFSL) and CL, both subsidiaries of Bank of Ceylon (BOC; 'AA+(lka)'/Stable) on 22 August 2013
The agency has also affirmed the National Long-Term Rating of the surviving entity, MFSL, at 'BBB(lka)' with a Stable Outlook, which is based solely on strong expectations of support from parent BOC, in case of need.
Key Rating Drivers
CL's upgrade prior to withdrawal was to equalise the rating with MFSL's National Long-Term Rating. This is because after the merger, CL's creditors are now exposed to the same credit risk as MFSL's creditors.
MFSL's rating is based on strong expectations of support to MFSL from BOC, which continues to have a dominant effective shareholding of 80% post-merger. The core business of the merged entity is likely to remain vehicle finance, in the form of finance lease and hire purchase.
Fitch considers the standalone credit profile of the merged entity to be weak, driven by deteriorating asset quality, a thin loss-absorption capacity, and declining profitability. Non-performing loans net of reserves amounted to 270% of equity in H113, undermining the company's solvency. Return on average assets fell to 0.1% in H113 from 2% in 2012 due to a declining net interest margin.
Fitch expects capitalisation of the merged entity to remain thin, with MFSL's pre-merger ratios of equity/assets and Fitch core capital/risk-weighted assets falling to 8.6% and 10.2% in H113 from 9.5% and 10.9% in 2012. CL's equity/assets ratio increased marginally to 14.1% at end-H113 (2012: 13.9%) due to a contraction of its loan book, but CL comprises only 24% of the merged entity's equity.
Liquidity of the merged entity is also quite thin. As a finance company, MFSL's funding is predominantly from term deposits, which, although improving, remain concentrated and have a modest retention rate. Maturity mismatches under a 12-month period remain high - as is the case across domestic peers - with unutilised credit lines insufficient to bridge the gap. Nevertheless, Fitch expects adequate liquidity support from BOC would be forthcoming if required. Notes issued by CL are likely to be converted to deposits upon maturity if rolled over.
Rating Sensitivities
MFSL's rating is sensitive to changes in the willingness or the ability of BOC to support the company. This would include any significant changes in BOC's effective shareholding or board control.
MFSL's current shareholders are BOC with a 50% stake, Merchant Bank of Sri Lanka Plc (72.1% subsidiary of BOC) with 41.6% and minority shareholders holding 8.3%.