Fitch places Ceylease Financial on rating watch evolving on proposed merger

Thursday, 28 July 2011 00:12 -     - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has placed Ceylease Financial Services Ltd’s (CFSL) National Long-Term ‘BB+(lka)’ rating on Rating Watch Evolving (RWE).

The rating action follows Merchant Bank of Sri Lanka Plc’s (MBSL) announcement on 4 May 2011 that the Central Bank of Sri Lanka has provided “in-principle approval” for the issue of a specialised banking licence to MBSL. The licence is subject to a merger between CFSL (55%-owned by Bank of Ceylon (BOC; ‘AA(lka)’/Positive) group), MBSL (effective ownership of 72% by BOC group), Merchant Credit of Sri Lanka Ltd (‘BBB(lka)’/RWE, effective ownership of 86% by BOC group) and MBSL Savings Bank Ltd. (effective ownership of 49% by BOC group).

The RWE reflects uncertainty regarding the modalities and resolution of the intended merger, the expectation of BOC’s support to, and the credit profile of, the merged entity. Retention of the merged entity within the BOC group and an increase in BOC’s effective shareholding may lead to a rating upgrade. Conversely, a decrease in BOC’s effective shareholding through, for example, a divestment of the merged entity and disassociation with the BOC franchise may lead to a downgrade.

Fitch believes that this potential merger would consolidate and simplify BOC’s group structure and considers it likely that BOC maintains majority ownership in and hence continues to support the merged entity. That said Fitch considers that it is a possibility that BOC may reduce its ownership stake in the merged entity or that integration between BOC and the merged entity may reduce following the merger.

CFSL’s rating reflects its association with its main shareholder, state-owned BOC, in terms of the latter’s shareholding of 55% and representation on CFSL’s board, and could be affected by a change in circumstances that would warrant a review of Fitch’s opinion on the expectations of support from BOC. CFSL is a small specialised leasing company (SLC), which was founded in 1996 by BOC and the Phoenix Group. In 2009, the Phoenix Group divested its stake to 27.5%, in favour of Prime Lands Pvt. Ltd., a local real-estate development agency, which now owns 17.5% of CFS. CFSL’s total assets amounted to LKR1.5bn at FYE10. The company operates via two outlets.