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Financial service subsidiaries pressure SL corporate ratings: Fitch

30 Jun 2021

  • Assumes 10% average asset growth in subsidiaries

  Sri Lankan rated corporates with financial service (FS) subsidiaries face a rise in Fitch-adjusted debt and potential rating pressure due to the subsidiaries’ medium-term asset growth in the current weak operating environment, Fitch Ratings said. Fitch’s corporate rating criteria deconsolidates the FS subsidiary from the parent in calculating the parent’s credit metrics. However, for FS operations that are considered strategic to the corporate parent, Fitch assumes a hypothetical capital infusion from the parent into the FS subsidiary when calculating the parent’s Fitch-adjusted leverage. The capital infusion’s size is based on the rating agency’s assessment of the subsidiary’s self-sustaining capital structure, considering its asset quality and funding risks, and its reported debt/tangible equity ratio. Therefore, faster asset growth in FS subsidiaries than their expectations, or subsidiaries’ capital buffers eroding faster due to higher operating or credit costs amid a weak operating environment, could increase the implied capital infusion required from the parent. “We assumed around 10% average annual asset growth for the FS subsidiaries of Singer (Sri Lanka) PLC (AA [lka]/Stable), Abans PLC (AA [lka]/Stable), and Dialog Axiata PLC (AAA [lka]/Stable). Singer would potentially be the most affected if its FS subsidiary, Singer Finance (Lanka) PLC’s (SFP: A+ [lka]/Stable) asset growth materially exceeds our expectations in light of its large asset base compared with the parent’s operating scale.” According to Fitch, Abans’ balance sheet is already stretched on account of a real estate project and any increased burden from the FS subsidiary, Abans Finance PLC (AFP: A [lka]/Rating Watch Evolving), could pressure the parent’s rating. However, Abans’ leverage should ease if its plan to sell AFP materialises. Fitch does not foresee rating pressure on Dialog from its FS subsidiary, Dialog Finance PLC (DFP: AA [lka]/Stable), due to the parent’s high rating headroom.


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