ICRA Lanka assigns [SL]BBB+ rating for the proposed LKR 3.5 Bn Debenture program of Softlogic Capital PLC
|Instrument||Rated Amount (LKR Mn)||Outstanding Amount (LKR Mn)||Rating Action|
|Proposed Senior, unsecured, listed redeemable, debentures||3,500||–||[SL]BBB+ (Stable); assigned|
|Issuer Rating||N/A||N/A||[SL]BBB+; reaffirmed; ‘rating watch with Developing implications’ removed and ‘stable’ outlook assigned|
|Senior, unsecured, listed redeemable, debentures||1,500||1,500||[SL]BBB+; reaffirmed; ‘rating watch with Developing implications’ removed and ‘stable’ outlook assigned|
ICRA Lanka Limited has assigned the issue rating of [SL]BBB+ (pronounced S L Triple BBB plus) with Stable outlook to the proposed LKR 3,500 Mn (an initial issue of LKR 2,000 Mn with option to raise a maximum of LKR 3,500 Mn) senior, unsecured, listed, redeemable debenture programme of Softlogic Capital PLC (hereafter referred to as SCAP or “the Company”).
ICRA Lanka has also reaffirmed the Issuer Rating of SCAP at [SL] BBB+ (pronounced as S L triple B plus). ICRA Lanka has also reaffirmed the Issue rating of [SL]BBB+ (pronounced as S L triple B plus) for the existing LKR 1.5 Bn senior, unsecured, listed, redeemable debenture programme of the Company. The outlook on the ratings have been revised to Stable from rating watch with developing implications, as SCAP announced on August 06, 2021 that it had terminated the proposed acquisition of Abans Finance PLC (AFP, rated A with evolving outlook by Fitch).
The ratings factor in the Company’s sizeable shareholding (about 52%) in Softlogic Life Insurance (SLI; rated [SL]A/Stable for insurance financial strength), the third largest life insurer in Sri Lanka and the synergies from being part of the diversified conglomerate, Softlogic Holdings PLC (SHL; rated [SL]BBB/Negative). However, the large capex plans and liquidity needs of SHL’s group entities are envisaged to limit its ability to provide any sizeable support to SCAP in the medium term. Further, ICRA Lanka is cognizant of SCAP’s dependence on dividend income from its subsidiaries, namely SLI and Softlogic Finance PLC (SFP; issuer rating of [SL]BB-/Rating watch with developing implications), which exposes it to the risk of experiencing cashflow/dividend volatility, going forward. The ratings factor in SFP’s immediate capital need of LKR 900 Mn, for which SCAP is expected to provide support in the near term. The ratings also factor in the standalone gearing of 1.01x in June 2021 and 0.99x in March 2021 (1.29x in March 2020). The ratings also note that the proposed LKR 3.5 Bn debenture issue of SCAP is expected to increase the standalone gearing to about 1.8 – 2.0x in March 2022, as per ICRA Lanka’s estimates. Going forward, healthy performance of the subsidiaries, and maintaining comfortable levels of liquidity and capitalization, are key from a rating perspective.
The outlook may be revised to “Positive” if SCAP’s standalone financial profile improves significantly or if the risk profile of the subsidiaries improves. The outlook may be revised to “Negative” in case of an increase in standalone leverage, weakening in its liquidity and earnings or in case of deterioration in the risk profile of its subsidiaries.
Key rating drivers
Part of the Softlogic Group; sizable shareholding in Softlogic Life Insurance PLC: SCAP represents the financial services segment of the diversified conglomerate Softlogic Holdings PLC (SHL, rated [SL] BBB (Negative outlook)). Being part of the Softlogic group provides access to managerial and financial support from the group entities and the ability to leveragesynergiesbetween different business units of the group (e.g. Asiri Hospitals and Softlogic Life Insurance). However, ICRA Lanka takes note of the large capital expenditure and near-term liquidity needs of the Softlogic group, which limits SHL’s ability to support SCAP financially in the medium term.
SCAP holds a 52% controlling stake in Softlogic Life Insurance PLC, the third largest life insurance provider in Sri Lanka with a market share of 16.4% as in June 2021. SLI has been able to perform above the industry average over the last few years, with its net profit standing at LKR 1,521 Mn in CY2020 (LKR 2,173 Mn in CY2019) with a RoE of 16.8%. Further, in H1 CY2021, SLI was able to earn healthy net profit of LKR 920 Mn with a RoE (adjusted for one-off deferred taxes) of 23.4%. The healthy internal generation of the life insurer is expected to support its growth capital requirements; thus SCAP may not have to extend any support to the subsidiary in the medium term. Conversely, SLI has been able to provide regular dividends to SCAP, subject to the life insurer’s own regulatory capital requirements and expansion needs (dividend payout has been on average 35% in the last 6 years).
Adequate near-term liquidity; medium term payments may need to be re-financed: The Company does not have any sizeable repayments in FY2022 and FY2023. SCAP has structured all its debt payments into long term bullet re-payments, as opposed to regular loan amortization, which provides comfort from a near term liquidity perspective. However, ICRA Lanka takes note of the corporate guarantees given to group companies (LKR 1,631 Mn to SHL and LKR 75 Mn to Softlogic Stock Brokers as of March 2021) which may lay some pressure on liquidity, going forward. The standalone interest cover stood at 1.4x in FY2021, vis-à-vis 0.1x in FY2020 (1.2x in FY2019), largely due to dividends of LKR 485 Mn received from SLI. ICRA Lanka envisages the interest cover to remain adequate in the near term, due to the expected dividends from subsidiaries.
Moderate gearing profile: The standalone gearing stood at 1.01x in Jun-21 vis-à-vis 0.99x in Mar-21 (1.29x in Mar-20).The gearing slightly increased due to a LKR 1.5 Bn debenture issue in FY2020. The Company had also raised LKR 1.0 Bn in equity capital via a rights issue undertaken in Nov-20. SCAP expects to issue a LKR 3.5 Bn senior, unsecured redeemable debenture in September 2021. Hence, ICRA Lanka envisages the standalone gearing to rise to around 1.8x-2.0x with the additional borrowings. Consolidated gearing (net of minority shareholders) stood at 3.96x in Jun-21 and 3.96 in Mar-21 (4.38x in Mar-20); excluding public deposits, the same stood at 1.70x and 1.66x in Jun-21 and Mar-21, respectively.
Capital requirements of Softlogic Finance PLC (SFP): As in Jun-21, SCAP was the controlling shareholder of Softlogic Finance PLC (SFP, rated [SL] BB-/Rating watch with developing implications), with 91% ownership. Due to a provisioning gap between IFRS 9 provisioning and CBSL provisioning requirements, SFP has been operating below regulatory capital thresholds. Previously, SCAP was planning to acquire Abans Finance PLC (AFP), and amalgamate same with SFP. However, the planned acquisition was terminated in August 2021. SFP raised around LKR 1.9 Bn via a rights issue in Nov-20 and LKR 2.2 Bn through a rights issue in Aug-21 which improved its core capital profile. The core and total CAR ratios of the NBFI both stood at 8.18%, against the regulatory limits of 7.0% and 11.0% in Aug-21. To bring its total CAR ratio above regulatory limits, SFP expects to issue sub-debt of LKR 900 Mn in FY2022 with SCAP being expected to subscribe for the entirety of the sub-debt placement. ICRA Lanka considers the future funding support towards SFP to be a key monitorable, going forward.
Lumpy earnings profile; dependence on dividend income: As in Jun-21, investments in group entities accounted for close to 82% (81% in Mar-21) of the total standalone asset base of SCAP. Correspondingly, the dividend income from subsidiaries (mainly SLI) has been the key source of income for SCAP (71% of recurring standalone income in FY2021 vis-à-vis 1% in FY2020 and 70%in FY2019), with the balance income represented by fee income from providing services, including fund management. ICRA Lanka notes that the dividend payouts of SLI and SFP are subject to the regulatory and growth capital requirements of the respective entities, which exposes SCAP to the risk of dividend/cash flow volatility going forward. Nonetheless, ICRA Lanka takes comfort from the high dividend visibility of SLI due to its healthy earnings.
Analytical approach: For arriving at the ratings, ICRA has applied its ratings methodologies as indicated below:
Links to applicable criteria: ICRA Lanka Issuer Rating Methodology
Softlogic Capital PLC (SCAP) is the financial services holding company of the Softlogic Group. The Softlogic Group is a diversified conglomerate listed on the Colombo Stock Exchange (CSE) with interests in healthcare, retail, financial services, ICT, leisure and automotive sectors. A listed company itself, Softlogic Capital PLC has two listed subsidiaries, Softlogic Life Insurance PLC, (a licensed insurance company, with 52% holding) and Softlogic Finance PLC (a licensed finance company, with 91.17 % holding). The Company also fully owns Softlogic Stock Brokers (Pvt) Ltd, a licensed stock broker of the Colombo Stock Exchange and Softlogic Asset Management (Pvt) Ltd, an investment management company.
For FY2021, SCAP (standalone) reported a net profit of LKR 393 Mn on a gross income of LKR 829 Mn, compared with a net loss of LKR 267 Mn on a gross income of 191 Mn in the previous fiscal. For Q1 FY2022, SCAP reported a standalone net loss of LKR 103 Mn on a gross income of LKR 31 Mn vis-à-vis a standalone net loss of LKR 92 Mn on a gross income of LKR 59 Mn in Q1 FY2021.
For FY2021, the SCAP group reported a consolidated net profit of LKR 365 Mn on a gross income of LKR 20.9 Bn, compared to a net profit of LKR 1,168 Mn on a gross income of LKR 17.8 Bn in the previous fiscal. For Q1 FY2022 , the SCAP group reported a consolidated net profit of LKR 263 Mn on a gross income of LKR 5.4 Bn vis-à-vis a consolidated net loss of LR 440 Mn on a gross income of LKR 4.0 Bn in the same period of the prior fiscal.
|Apsara Thurairetnam |
Assistant Vice President
Subsidiary of ICRA Limited
A Group Company of Moody's Investors Service
CORPORATE OFFICELevel10, East Tower, World Trade Center, Colombo 01, Sri Lanka Tel:+94 11 4339907;Fax:+94112333307 Email:email@example.com; Website:www.icralanka.com
© Copyright, 2021 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.
ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.
All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.
ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.
ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.