March, 27, 2015
Fitch Ratings Lanka has upgraded Sri Lanka-based AMW Capital Leasing and Finance PLC's (AMCL) National Long-Term Rating to 'BBB+(lka)' from 'BB-(lka)'. The Outlook is Stable. The multiple-notch upgrade follows Fitch's assessment of support from its 90%-parent, Associated Motorways Limited (AMW).
KEY RATING DRIVERS
AMCL's rating reflects Fitch's view that support would be forthcoming from AMW, given the finance company's strategic importance to the latter. This assessment is based on AMCL's role in group, given strong synergies and operational integration. While its share of financing of AMW's vehicle sales has remained moderate AMCL accounted for a substantial share of group profit and assets at end-2014. About 46% of its advances comprised vehicle finance facilities provided to its parents' clients (2013: 49%).
AMW is involved in the strategic direction of AMCL, having three out of nine seats on AMCL's board and through the involvement of current senior managers, including the Managing Director of AMW.
Fitch believes that additional incentives for AMW to provide support to AMCL stem from the common AMW brand, which could have high reputational impact on AMW should AMCL default. Of AMCL's 17 branches, 10 are based within AMW branches. In addition AMCL's funding relies on the parent, which provided 67% of AMCL's borrowings at end-2014.
AMW's rating factors in its modest credit profile, and its stable and strong market share in the import and distribution of new vehicles in Sri Lanka, particularly through products from the Maruti Suzuki brands that are aimed at price-conscious consumers. These vehicles are more likely to be sold in greater volumes through macroeconomic cycles compared with high-end products where import duties and indirect taxes are higher.
AMCL's intrinsic financial strength, while having improved, is considerably weaker than the support assessment and thus no longer a rating driver.
AMCL's rating is sensitive to changes in its parent's ability and propensity to provide support.
AMCL's rating may be downgraded if AMCL's size relative to AMW increases and if its operations become more independent of that of its parent.
AMW's rating could be downgraded if there is a weakening of its financial profile, including its leverage as measured by adjusted net debt/ EBITDAR, a sustained reduction in the market share of vehicle brands such as Maruti Suzuki, or a material dilution in the relationship between AMW and its automotive end-brands, particularly Maruti Suzuki. AMW's rating may be upgraded if there is a sustained increase in its market share in brand new vehicle sales in Sri Lanka.
In the event of a reduction in its stake by AMW in AMCL, assuming that AMW retains majority ownership, will not necessarily change Fitch's classification of AMCL as a "strategically important" subsidiary of AMW.