Sri Lankan conglomerates with subsidiaries of finance companies could face pressures on their leverage and, consequently, on their credit ratings, as the growth of finance companies amid weak market conditions. operation may require increased support from parent companies, which may need to be covered by new debt.
According to a new report from Fitch Ratings, which looked at companies with subsidiaries of finance companies, the rating agency said those parent companies would face an increase in adjusted debt from Fitch Rating due to the growth in medium-term assets in the current weak operating environment, which in put pressure on the profits of the parent company.
“An aggressively expanding financial services subsidiary in a weak operating environment like Sri Lanka could increase the adjusted debt of a parent company and put pressure on the rating of the parent company,” said Nadika Ranasinghe, co-author of the report. .
The rating agency took Singer Sri Lanka PLC, Abans PLC and Dialog Axiata PLC as parent companies with financial services subsidiaries as part of its study and assumed their medium-term asset growth of 10% on average for a year.
The rating agency said that asset growth significantly above expectations could put pressure on Singer and Abans ratings, Dialog’s rating is expected to stay due to its higher debt margin.
“Singer is potentially the most affected as its financial services subsidiary, Singer Finance (Lanka) PLC, has a large asset base thanks to strong loan growth in recent years,” said Fitch Ratings.
The rating agency has forecast an average growth of 11% in its asset base from FY22 to FY25, compared to an average annual growth of 9% over the past three years.
Fitch estimates that this growth in assets in a weak operating environment could add Singer Sri Lanka PLC an adjusted debt of around Rs.11 billion to Rs.12 billion to the parent company’s leverage ratio.
Fitch’s corporate rating criterion deconsolidates the parent company’s financial services subsidiary when calculating the parent company’s credit metrics.
However, for financial services operations, which are considered strategic for the parent company, the rating agency assumes a hypothetical capital injection from the parent company into the financial services subsidiary when calculating their adjusted leverage.
“The size of the capital injection is based on our assessment of the subsidiary’s autonomous capital structure, taking into account the quality of its assets and financing risks, and its tangible debt-to-equity ratio,” said added Fitch.
Therefore, higher than expected asset growth or faster erosion of capital buffers due to higher operating and credit costs in a weak operating environment could increase the implicit capital injection required of the company. share of the parent company.
Meanwhile, for Abans PLC, Fitch said the company’s balance sheet was already strained due to a real estate project and any additional charges from its finance company subsidiary could put pressure on their ratings. “However, Abans’ leverage is expected to wane if its plan to sell Abans Finance PLC comes to fruition,” added Fitch.
Last September, the Softlogic group announced a planned acquisition of Abans Finance and a merger with Softlogic Finance.
Dialog Axiata PLC, on the contrary, has more leverage if its finance company subsidiary, Dialog Finance PLC, needs support and therefore does not put pressure on its parent company’s rating.
Sri Lanka’s financial firms have gone through a period of weak growth, higher nonperforming loans and lower profits compared to their banking sector counterparts, and their difficulties have been exacerbated since last year due to headwinds induced by the pandemic.