Orient Finance PLC

ICRA Lanka reaffirms the issuer rating of [SL]BB+ for Orient Finance PLC; retains Negative outlook

Instrument Rated Amount (LKR Mn) Rating Action
Issuer rating N/A [SL]BB+ with Negative outlook; reaffirmed
Guaranteed redeemable debenture programme 1,000 [SL]A-(SO); rating continues under watch with developing implications

Rating action

ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service has re- affirmed the issuer rating at [SL]BB+ (pronounced SL double B plus) for Orient Finance PLC (OFP or the Company). The outlook on the rating continues to be Negative.

ICRA Lanka continues to keep the rating of [SL]A-(SO) (pronounced SL A minus Structured Obligation) for the LKR 1,000 Mn guaranteed redeemable debenture programme under watch with developing implications. The letters SO in parenthesis suffixed to a rating symbol stand for Structured Obligation. An SO rating is specific to the rated issue, its terms, and its structure. The SO rating does not represent ICRA Lanka’s opinion on the general credit quality of the issuer concerned.

Rationale

The issuer rating factors in the expected support from the Janashakthi group; Janashakthi PLC (JPLC), the holding company of the group (holding 90% equity stake in OFP as in June 2019) is rated [SL]BBB-, with Negative outlook. The issuer rating however considers the weakening in OFP’s asset quality, subdued financial performance, stretched liquidity profile and deterioration in capital structure to below regulatory thresholds; Company’s Tier-1 capital ratio stood at 4.9% (regulatory minimum is 6.5%) and total capital  adequacy ratio stood at 8.0%( regulatory minimum is 10%) in June 2019. Consequently, the Central Bank of Sri Lanka (CBSL) in April 2019 has imposed a portfolio cap of LKR 15 Bn on the Company. The Company’s portfolio declined to LKR 15.5 Bn in March 2019 from LKR 15.7 Bn in March 2018 and LKR 17.1 Bn in March 2017 and is expected to remain at current levels in view of the lending restrictions. The rating takes into account the expected conversion of LKR 400 Mn preference shares (currently held by JPLC) into common equity by September 2019 and a proposed capital raising plan of LKR 500 Mn in the current fiscal, which is expected to improve the  overall capital profile. Going forward, significant improvement in the capital profile over the next 1-2 quarters and compliance with the regulatory requirements, would be crucial from a rating perspective. Further, keeping a control on incremental slippages, improvement in the earnings indicators and liquidity profile would also be critical.

The rating for the LKR 1,000 Mn Guaranteed Redeemable Debentures programme is based on the strength of an unconditional and irrevocable guarantee from Janashakthi General Insurance Limited (JGIL/the Guarantor), a subsidiary of Allianz SE from February 2018, to the extent of the entire principal and two interest instalments, and the payment mechanism designed to ensure repayment of the rated instrument even if OFP does not pay. The rating also assumes that the guarantee will be duly invoked by the debenture trustee, as per the terms of the underlying transaction, in case there is a default in payment by OFP. ICRA Lanka has an insurance financial strength rating of [SL]A (pronounced SL A) on JGIL, which is currently under watch with developing implications.

Outlook: Negative

The Negative outlook reflects weak asset quality, expectation of subdued growth performance because of lending restrictions and modest overall financial risk profile, which is expected to exert pressure on OFP’s near-term performance. The outlook may be revised to Stable in case of substantial improvement in the capital structure, asset quality, and earnings profile of OFP. The rating may be revised downwards, in case of delays in securing envisaged equity capital resulting in the capital structure remaining stretched or below regulatory levels, lower than expected support from the Janashakthi group or in the event of further weakening in OFP’s asset quality and other financial indicators.

 Key rating drivers

Credit strengths

Part of the Janashakthi group; OFP is 90% owned by JPLC, the holding company of the Janasakthi group. JPLC envisions to undertake stake sale of some its entities to improve the group’s financial profile in the near term and enable it to meet certain group entity requirements, including OFP’s.  JPLC however has limited financial flexibility at present, which could constrain timely support to OFP.

Credit challenges

Deterioration in asset quality indicators; OFP’sgross NPA levels increased to LKR 1,698 Mn in March 2019 from LKR 1,399 Mn in March 2018; the gross NPA ratio stood at 10.96% as in March 2019 vis-à-vis 8.90% and 5.98% in March 2018 and March 2017, respectively. From March 2018 to March 2019, the increase in the NPAs were mainly observed in the equipment financing and factoring segments. The NPAs in the cars, vans, commercial vehicles, 3W and 2W portfolios have reduced during the same period, however a sizeable portion of this reduction was due to write-offs amounting to LKR 684 Mn in FY2019. Undertaking effective recoveries and keeping incremental slippages under control would be crucial going forward.

Capital profile below regulatory requirements; OFP is currently below the minimum thresholds in terms of the new capital adequacy framework, with the Tier 1 CAR standing at 4.9% (regulatory minimum is 6.0%) and total CAR at 8.0% (regulatory minimum is 10%) in June 2019. ICRA Lanka notes that the LKR 15 Bn lending cap imposed by the CBSL due to the present capital shortfall, would impact portfolio growth in the current year.  To improve its core capital base, OFP envisions to convert its preference shares of LKR 400 Mn, which are subscribed by JPLC, into common equity by September 2019. Moreover, the Company also expects to raise additional LKR 500 Mn in the current financial year, which is envisaged to boost Total CAR to above the regulatory threshold. However, ability to raise the required capital in a timely manner would be a key monitorable.

ICRA Lanka notes that the Company’s minimum core capital stood at LKR 2,166 Mn as on March 2019 as against the regulatory requirement of LKR 2.0 Bn by January 2020. The envisaged capital raising would support the Company in meeting the higher core capital requirement of LKR 2.5 Bn which is required by January 2021

Weak profitability indicators; The core product of OFP is vehicle leasing accounting for about 72% of the portfolio in March 2019 (73% in March 2018). The vehicle leasing industry is characterized by a high level of competition as well as regulatory restrictions, which have contributed towards constrained portfolio growth. ICRA Lanka takes note of the increase in the NIMs during FY2019 to 7.3 % from 6.4% in FY2018 as the Company’s business yields increased, however increases in the operating costs and credit costs impacted the overall profitability. The deteriorating asset quality has pushed up the credit costs to 3.2% of average total assets in FY2019 vis-à-vis 2.9% in FY2018 and 1.8% in FY2017. Overall, OFP reported a modest net profit of LKR 29 Mn in FY2019, compared to a net loss of LKR 110 Mn reported in the previous fiscal.

Stretched liquidity profile: The asset liability mismatch (cumulative < 1 year) proportion (of total assets) has increased from 8.9% in March 2018 to 14.9% in December 2018, because of an increase in net short term borrowings. However, OFP’s funding profile consisting mainly of deposits (71% of total debt) with a healthy renewal rate (around 80%), and access to sanctioned undrawn facilities of about LKR 1.0 Bn in June 2019, provides some comfort on liquidity.

Analytical approach: For arriving at the ratings, ICRA has applied its ratings methodologies as indicated below.

Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Non- Banking Finance Companies

Company Profiles:

Orient Finance PLC (formerly known as Bartleet Finance PLC, BFP, prior to the acquisition of erstwhile –Orient Finance PLC and its subsequent merger process) was incorporated in 1981. The Company is a registered finance company and is licensed by the Monetary Board of Sri Lanka to accept Fixed Deposits from the public. The Company was listed on the Main Board of the Colombo Stock Exchange in June 2011.

In July 2015, BFP acquired erstwhile-Orient Finance Plc after paying close to LKR 1.70 Bn in cash and 1,213 Bartleet shares to the erstwhile-Orient Finance Plc shareholders. After the merger, the Company was renamed as Orient Finance PLC and Janashakthi PLC became the main shareholder of the Company with a 99.9% shareholding.  In January 2015, OFP made an initial public offer (IPO) of about LKR 1.0 Bn. Objective of the IPO was to improve the capital structure of the Company and settle the short term loan obtained from Orient Capital Limited (a fully owned sub-subsidiary of Janashakthi PLC) for the acquisition. As of June 2019, Janashakthi PLC holds 89.8% shareholding in OFP.

Recent Results

During the year ended March 2019, OFP reported a net profit of LKR 29 Mn on a total asset base of LKR 17,360 Mn, compared to a net loss of LKR 110 Mn on a total asset base of LKR 18,115 Mn in the previous financial year.  For the three months ended June 2019, OFP reported a net loss of LKR 103 Mn on a total asset base of LKR 16,924 Mn.

Janashakthi PLC (Parent Company)

Janashakthi PLC is an investment holding company incorporated in the year 1990. The Company is owned and managed by the Schaffter family (Mr. Prakash Schaffter 50%, Mr. Ramesh Schaffter 50%). The main subsidiaries include Janashakthi Insurance PLC and Orient Finance PLC. In September 2018, JPLC acquired controlling stake of Dunamis Capital PLC, the holding company of the First Capital group and presently holds 98.08% of the same.

During the financial year ended March 31, 2019 Janashakthi PLC reported a standalone net loss of LKR 983 Mn on a total operating income of LKR 260 Mn, compared to a net profit of LKR 8,011 Mn, on a total operating income of LKR 194 Mn in the corresponding period of the previous fiscal. On a consolidated basis, the Janashakthi group reported a net profit of LKR 1,233 Mn on a total income of LKR 9,189 Mn in FY2019 compared to a net profit of LKR 8,563 Mn on a total income of LKR 7,669 Mn for the previous fiscal.

Orient Finance PLC – Audited

Rating history for last three years:

ANALYST CONTACTS

Ms. Apsara Thurairetnam

+94 11 4339907

apsara@icralanka.com

Mr. A.M. Karthik

+91 44 45964308

a.karthik@icraindia.com

RELATIONSHIP CONTACT

Mr. W. Don Barnabas  

+94 11 4339907

wdbarnabas@icralanka.com


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