ICRA Lanka reaffirms Softlogic Capital issue ratings
ICRA Lanka Ltd. has reaffirmed the issuer rating of Softlogic Capital PLC at (SL) BBB+ on Monday (1). ICRA Lanka has also reaffirmed the issue rating of (SL) BBB+ on the senior, unsecured, listed, redeemable debenture programme of Softlogic Capital. In addition, the ratings were said to remain on watch with developing implications.
The ratings factor in the company’s sizeable shareholding which totals to about 52% in Softlogic Life Insurance (SLI) consisted of SLI rated (SL) A/Stable for insurance financial strength. According to ICRA Lanka, the third largest life insurer in Sri Lanka and the synergies from being part of the diversified conglomerate Softlogic Holdings PLC consisted of SHL (well-known psychometric test publisher); rated (SL) BBB+/Negative.
Nevertheless, ICRA Lanka noted that the large capital expenditure plans of the group entities of SHL would limit its ability to provide any sizable financial support to Softlogic Capital over the medium term. ICRA Lanka is cognizant of Softlogic Capital’s dependence on dividend income from its subsidiaries, namely SLI and Softlogic Finance (Pvt.) Ltd. (SFP) which has a SFP; issuer rating of (SL) BB-/rating watch with developing implications, which can expose it to the risk of experiencing cash flow/dividend volatility, going forward.
The ratings factor in the immediate capital needs of SFP, which may require further support from Softlogic Capital in the event the non-banking financial institution (NBFI) is unable to turn around its performance. Softlogic Capital had raised Rs. 1.0 billion in equity via rights issue in November 2020 which was utilised towards SFP’s rights issue which also took place during the same period.
The rating noted the plan to acquire Abans Finance (Pvt.) Ltd. (AFP) which acquired an AFP, rated BB+/Negative by Fitch, in the near term and to amalgamate the same with SFP. However, ICRA Lanka estimates the leverage to remain moderate (1.42x in September 2020) post the AFP acquisition. Going forward, healthy performance of the subsidiaries and maintaining comfortable levels of liquidity and capitalisation is the key from a ratings perspective.
The ratings are expected to remain on watch with developing implications until the AFP acquisition is completed, and the impact on Softlogic Capital’s subsidiary, SFP, is evaluated. The outlook may be revised to “Stable” if Softlogic Capital’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.
Part of the Softlogic Group, with a sizeable shareholding in Softlogic Life Insurance (Pvt.) Ltd., Softlogic Capital represents the financial services segment of the diversified conglomerate Softlogic Holdings PLC acquiring a SHL, rated (SL) BBB+ with a Negative outlook.
Being part of the Softlogic Group provides access to managerial and financial support from the group entities and the ability to leverage synergies between different business units of the group such as Asiri Hospitals and SLI. However, ICRA Lanka takes note of the large capital expenditure and high leverage of the Softlogic Group, which limits SHL’s ability to support Softlogic Capital financially in the near to medium term.
Softlogic Capital holds a 52% controlling stake of SLI with a market share of 16.2% as in March 2020. SLI has been able to perform well above the industry average over the last seven years, with the company’s core net profit excluding deferred tax at Rs. 1.095 million and Rs. 2.173 million in 2018 and 2019, respectively.
The healthy internal generation of SLI is expected to support its growth capital requirements; thus Softlogic Capital may not have to extend any support to the subsidiary in the medium term. Conversely, SLI has been able to provide regular dividends to Softlogic Capital, subject to the life insurer’s own regulatory capital requirements and expansion needs such as dividend payout has been on average 30% in the last five years.
In terms of adequate near-term liquidity, the company does not have any sizeable repayments in fiscal years (FYs) 2021 and 2022. Softlogic Capital has structured all its debt payments into long-term bullet repayments, as opposed to regular loan amortisation, which provides some comfort from a near term liquidity perspective.
Further, Softlogic Capital has not provided sizable guarantees for its group companies, except for the corporate guarantee of Rs. 75 million extended to Softlogic Stock Brokers. The standalone interest cover was reduced to 0.01x (FY) 2020, face to face with 1.23x in FY 2019 (1.68x in FY 2018), as SLI did not pay a dividend during FY2020.
However, the same is expected to improve in FY 2021 with the expected receipt of dividends from subsidiaries. Moderate gearing profile: The standalone gearing stood at 1.42x in September 2020 face to face with 1.29x in March 2020 (0.50x in March 2019), as the company has not undertaken any new investments over the last five years.
The company had also raised Rs. 1 billion in equity capital via a rights issue undertaken in November 2020. Going forward, ICRA Lanka is cognizant that Softlogic Capital may need to take on borrowings to complete the proposed acquisition of AFP.
ICRA Lanka envisages the standalone gearing to be in the range of 1.2x-1.5x in March 2021, with an additional borrowing of about Rs. 1 billion. Consolidated gearing with a net of minority shareholders, stood at 4.91x in September 2020 and 4.38x in March 2020 (4.29x in March 2019); excluding public deposits, the same stood at 1.5x and 1.2x in September 2020 and in March 2020, respectively.
Softlogic Capital PLC is a holding company under the Softlogic Group, a diversified conglomerate, listed on the Colombo Stock Exchange (CSE) with interests in healthcare, retail, financial services, ICT, leisure, and automotive sectors.
Softlogic Capital PLC has two listed subsidiaries, SLI, a licensed insurance company with 52% holding and SFP, is a licensed finance company with 85.07% 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., a Licensed Unit Trust Management company.