ICRA Lanka revises Vallibel Finance ratings

ICRA Lanka Ltd. has revised the issuer rating of Vallibel Finance Plc (VFP or the Company) to [SL] BBB with a stable outlook from [SL] BBB- with a stable outlook. 

ICRA Lanka has also revised the issue rating of the Rs. 500 million unsecured, subordinated, redeemable debenture program to [SL]BBB- with a stable outlook from [SL]BB+ with a stable outlook. ICRA Lanka has also reaffirmed the issue rating of [SL]AA-(SO) with a stable outlook for the Rs. 1,000 million guaranteed, subordinated, redeemable debenture program.

The rating revisions factor in VFP’s ability to grow its portfolio while maintaining a comfortable asset quality and profitability indicators. VFP’s portfolio reported a robust 33% growth during FY2017 (21% annualised in 9MFY2018), higher than the systematic average, in a competitive environment. The gross

NPAs remained below the systematic average and stood at 2.93% in December 2017 (2.93% in March 2017 and 3.76 in March 2016). VFP’s net profitability remained range bound at 2.6-2.8% levels for the last four years, notwithstanding some compression in interest margins, as credit cost declined following the improvement in the asset quality profile. ICRA Lanka, however, notes that the provision coverage moderated to 72% in December 2017 compared to 86% in March 2016; the same however remains adequate. The ratings continue to factor in the expected financial and managerial support from the Vallibel group of companies, its experienced senior management team, adequate internal controls and systems. 

The ratings however take note of the expected increase in competitive pressures, exposure to customers with a moderate credit profile and its high gearing level (9.7 times in December 2017). ICRA Lanka takes note of the proposed rights issue, which is expected to support its near-term capital profile, however considering the growth plans, the gearing is expected to remain high at about eight to nine times over the next two years. 

Going forward, VFP’s ability to maintain a healthy asset quality, adequate profitability and a comfortable risk-adjusted capital structure would be crucial from a rating perspective. The rating for the guaranteed subordinated redeemable debentures is based on the strength of the unconditional and irrevocable guarantee from Hatton National Bank Plc (HNB) covering the principal and two interest instalments (semi-annual) and, the undertaking from the Trustee to declare the entire guaranteed amount as payable in the event the issuer does not meet the scheduled interest payment on any due date or in the event the issuer does not redeem the debenture in full on any redemption date, to redeem the instrument in full. 

The guarantor undertakes the obligation to pay, on demand from the Trustee, Rs. 1,102.5 million, being the total principal sum and two half-yearly interest instalments of the proposed Guaranteed Subordinated Redeemable Debentures. The rating also assumes that the guarantee will be duly invoked by the Trustee, as per the terms of the underlying Trust deed, Trustee’ undertaking and guarantee agreements, in case there is a default in payment by VFP (Issuer).

ICRA Lanka believes that VFP would continue to benefit from the support from the Vallibel Group. The outlook may be revised to ‘Positive’ in case of steady improvement in VFP’ capital profile. The outlook may be revised to ‘Negative’ in case of weakening in the asset quality or a significant deterioration in the profitability and capitalisation profile from the current levels.