ICRA Lanka Reaffirms the ratings of LOLC Holdings PLC and rating watch with developing implications removed

May, 22, 2020

ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of [SL]A (pronounced as S L A) for LOLC Holdings PLC (“LOLC”/”the Company”), while revising the outlook to Stable from rating watch with developing implications.

ICRA Lanka has also reaffirmed the issue rating of [SL]A (pronounced as S L A) for the LKR 5,000 Mn Listed Senior Unsecured Redeemable Debenture Programme, the issue rating of [SL]A (pronounced as S L) for the LKR 2,000 Mn (remaining balance of the LKR 2,750 Mn) Listed Senior Unsecured Redeemable Debenture Programme, and issue rating of [SL]A1 (pronounced as S L one)  for the LKR 1,000 Mn Commercial Paper Programme; rating watch with developing implications placed on the aforementioned issue ratings has been revised to Stable outlook.

On April 10, 2020, LOLC Group has divested 70% of its stake in PRASAC for a total consideration of about USD 603 Mn. The investment was held by LOLC International Private Limited(LOLCIPL), a fully owned subsidiary of LOLC holdings, incorporated in Singapore. Accordingly, LOLCIPL has recived USD 422 Mn being the first tranche of the sales proceeds, in line with the share purchase agreement that had been entered into by the parties. The Group has used a significant portion (about USD 130Mn) of the proceeds  to repay the debt at the holding company level. The balance sales proceeds amounting to USD 181 Mn will be received in 2022.

ICRA Lanka takes cognizance of the improvement of the capitalization profile of the holding company, with standalone gearing expected to moderate to about 0.80x vis-à-vis 1.83x in December 2019 and 1.62x in March 2019. Consolidated Group gearing is also expected to moderate to about 3.7x vis-à-vis 6.3x in September 2019.

The rating also factors the significant moderation of the overall size and scale of LOLC Group, post divestment. As in September 2019, PRASAC accounted for about 45% of group assets and about 57% of the Group’s loan book. Also, PRASAC accounted for about 70% of the LKR 19.6 Bn PAT reported by the Group in FY2019. With the divestment of PRASAC, the Group’s overall size will significantly reduce, and the Group’s overall profitability will also moderate as PRASAC’s high yielding microfinance operation generated higher profits.

The rating also factors in the weakened asset quality (consolidated NPAs of the local NBFIs increased to 7.25% in Sep-19 from 5.29% in Sep-18) and earnings profiles (consolidated RoA moderated to 1.34% 1in H1FY2020 vis a vis 1.61% in H1FY2019) of the Sri Lanka based NBFCs (LOLC Finance PLC, Commercial Leasing & Finance PLC and LOLC Development Finance PLC) of the group over the recent past, which would account for the 60% of the group’s assets post PRASAC divestment and, drive the group level performance over the near to medium. Post the divestment of PPRASAC, ICRA Lanka expects the consolidated profitability to moderate further as PRASAC was the most profitable (RoA2 of 3.69% and 3.81% respectively of the 11MCY2019 and CY2018) subsidiary of the Group.