Central Finance goes for Rs. 3 b debenture; Fitch rates ‘A+ (EXP)’
Thursday, 9 April 2015 01:34
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Fitch Ratings has assigned Central Finance Company PLC’s (CF; A+(lka)/Stable) proposed senior secured debentures of up to Rs. 3 b an expected National Long-Term Rating of ‘A+(lka)(EXP)’.
The proposed debentures will have tenors of between three and five years, and fixed-rate coupons. CF expects to use the proceeds to fund lending growth, reduce structural maturity mismatches and diversify the funding mix. The debentures are secured by receivables from identified hire-purchase and lease agreements exceeding 110% of the total outstanding value of the debenture at any given time.
As the debenture issuance is secured, CF will not be required to maintain liquid assets against it. This is in contrast to unsecured borrowings for which CF will need to post a 10% minimum reserve with the central bank if not included in the company’s capital funds.
Fitch will assign a final rating to the issue subject to the receipt of final transaction documents conforming to information already received.
Key rating drivers
The issue has been rated at the same level as CF’s National Long-Term Rating. Fitch has not provided any rating uplift for the collateralisation as the secured notes’ recovery prospects are considered to be average and comparable with those of the unsecured notes in a developing legal system.
CF’s rating reflects its strong capitalisation, which is supported by robust profitability and high profit retention. Counterbalancing these strengths are the pressure on loan quality and its low provisioning levels compared with its peers’. The rating also captures CF’s high margins, which are supported by the company’s strength in raising funds at relatively low rates through the solid franchise developed over a long operating history.
Rating sensitivities
The rating of the issue will move in tandem with CF’s National Long-Term Rating.
Greater product diversity, together with improved funding flexibility commensurate with higher-rated peers, could lead to an upgrade in CF’s rating. However, taking into account the current pressure on its asset quality, Fitch does not see an upgrade as likely in the medium term.
CF’s rating could be downgraded if it is not able to provide a buffer against further loan quality deterioration through profit, which would lead to an increase in unprovided NPLs relative to equity.
