RAM assigns BBB+/P2 corporate credit ratings to Dunamis Capital
Wednesday, 23 April 2014 00:00
Company plans Rs. 1 billion debenture issue
RAM Ratings Lanka has assigned Dunamis Capital PLC (“Dunamis” or “the Company”) respective long- and short term corporate credit ratings of BBB+ and P2. Concurrently, it has assigned an initial issue rating of BBB to the Company’s proposed Rs. 1 billion Senior, Unsecured, Redeemable Debentures.
The long-term rating has a stable outlook. Dunamis is a holding company with interests in primary dealing, stock brokering, margin trading, debt structuring, asset management, property development and manufacturing. The Company and its subsidiaries are collectively referred to as the Group.
The Company’s primary income generator is its financial services arm, held by First Capital Holdings PLC (FCH) (rated BBB+/P2 by RAM Ratings Lanka). The bulk of FCH’s revenue and profits is generated by primary dealer First Capital Treasuries Limited (FC Treasuries). FC Treasuries is among the pioneer primary dealers in Sri Lanka, appointed by the Monetary Board of the Central Bank of Sri Lanka (CBSL) to deal with the CBSL as counterparty in the primary market and to trade in government securities in the secondary market.
Dunamis’ ratings are upheld by the Company’s exposure to minimal credit risk as most of the Group’s trading and investment securities is comprised of FCH’s investments in government securities, which carry minimal credit risk.
Meanwhile, FC Treasuries’ capitalisation levels are deemed good, supported by a risk-weighted capital adequacy ratio which comfortably surpassed the industry average in FY March 2013 and served as a sufficient buffer to absorb any loss arising from fluctuating interest rates.
Elsewhere, reflective of FCH’s liquidity position, Dunamis’ liquidity position is deemed good. Although a high proportion of the Group’s investments consist of highly liquid government securities, most of it has been pledged against REPO borrowings; approximately Rs. 230 million of its trading securities are unencumbered. We also note that the liquidity risk stemming from the Company’s property development arm is insignificant due to its minimal investments in this segment.
Meanwhile, we also opine that FC Treasuries – the Group’s largest revenue contributor – has an adequate risk management and monitoring framework. This is reflected in its risk measures, such as stop loss limits and the adoption of a modified duration formula measures the impact of a 1% movement in interest rates on the value of the trading portfolio), which are more conservative than that of its peers.
However, it is also noted that a primary dealer is exposed to the inherent volatility of the securities industry, which in turn is dependent on a range of factors including interest rates, government monetary policy, the state of the economy and government borrowing requirements. Portfolio values fluctuate in line with interest rate, which is reflected in FC Treasuries’ fluctuating performance over the years and FCH’s earnings profile. On this note, due to Dunamis’ heavy reliance on FCH (or its financial services subsidiaries) Dunamis’ earnings profile is further rendered volatile.
Dunamis’ subsidiary Kelsey Developments PLC is loss making.
Meanwhile, The Montessori Workshop Ltd. (Montessori Workshop) which made pre-tax losses in FY March 2013, was disposed of in January 2013. However, we also note that Kelsey made a pre-tax profit for the quarter ended September 2013, owing to intra-group property transfers.
The management has recently ventured into the manufacture of synthetic leather, which is primarily targeted at furniture, footwear and other leather product manufacturers in the country. While acknowledging that the venture will diversify Dunamis’ existing business profile and cash flow sources, thus alleviating its dependency on its financial services arm, we note that the requisite gestation period may hamper the Group’s performance in the immediate term.
The ratings for Dunamis’ debenture issue, has been notched down by 1 due to the structural subordination of Dunamis’ debts to that of its subsidiaries. As Dunamis is a non-operating investment holding company, we note that Dunamis’ priority debts (debts relating to its major operating subsidiary, FCH) as a percentage of the Group’s total assets (excluding money market instruments) is envisaged to exceed the threshold of 30% of the Group’s total assets (excluding money market instruments) as at FY Mar 2014 stemming from the Rs. 1 billion debenture issuance, thus giving rise to structural subordination.