Fitch On People's Leasing's Proposed Debenture

Fitch Ratings-Colombo/Mumbai/Singapore-03 July 2008: Fitch Ratings Lanka has today assigned a 'BBB+(lka)' National Long-term rating to Sri Lanka-based People's Leasing Company Limited's (PLC) proposed subordinated, unsecured, redeemable (five-year), listed debenture issue of up to LKR1 billion. At the same time, the agency has affirmed PLC's National Long-term rating of 'A-(lka)' (A minus (lka)). The Outlook is Stable.
The issue rating takes into account that the proposed debenture will rank as subordinated to PLC's existing senior debt. PLC's rating reflects its good financial profile, and People's Bank's (Sri Lanka) (PB, 'A-(lka)' (A minus(lka)) / Outlook Positive) 100%-ownership of its equity. PLC benefits from PB's strong brand franchise, and operational and funding support. PLC's rating is constrained by the market risk and limited funding diversity inherent in the specialised leasing company (SLC) sector.
Around 81% of PLC's loan growth during FY08 was funded by way of local institutional borrowings, with equity funding accounting for the remaining 19%. Lenders to the SLC sector have increasingly preferred shorter-term investment instruments during FY08, given the prevalent volatile interest rate environment. As such, PLC has increased issuances of commercial paper and promissory notes to fund its operations, progressively shifting the maturity profile of its borrowings towards the shorter term. Commercial paper and promissory notes in aggregate accounted for 35% of PLC's borrowings at FYE08 compared to 25% at FYE07. Long-term debt issues, such as the one proposed, should help PLC lengthen its funding maturities.
PLC's profitability, although strong compared to industry peers, fell during FY08 due to tightening interest margins and increasing inflationary cost pressures. Fitch expects PLC's profitability to be constrained over the short- to-medium term given the weak economic environment. PLC's gross NPL ratio ( measured by Fitch as loans in arrears for over three months) increased to 11.6% at FYE08 from 7.3% at FYE07 despite loan growth during the period. However PLC's recoveries have been good thus far, with most of its NPLs being regularised before they reach the six-months-in-arrears category (which is the regulatory threshold for the classification of NPLs for non-bank financial institutions), where it posted a NPL ratio of 1.8% at FYE08.
Established in 1996, PLC is a wholly-owned subsidiary of People's Bank, and enjoys a market share of around 10% of the leasing industry.
People's Bank owns 1.78% of the shares in Fitch Ratings Lanka Limited. No shareholder, other than Fitch Ratings Limited of the UK, is involved in the day- to-day operations of, or credit rating reviews undertaken by Fitch Ratings Lanka Limited.