Feb 19, Colombo: ICRA Lanka Limited has reaffirmed the Issuer rating of Softlogic Finance PLC at [SL] BB. The rating remains on watch with developing implications.
The rating takes note of the capital support provided by parent entity Softlogic Capital PLC (SCAP, rated BBB+/ Rating watch with developing implications) via the rights issues in Dec-19 and Nov-20, amounting to LKR 602 Mn and LKR 1,902 Mn, respectively.
The overall managerial and operational support of the Softlogic group is also factored into the rating. SFP’s Tier 1 and Total capital adequacy ratios (CAR) stood at -11.69% and -11.94%, respectively, in Sep-20, below the regulatory threshold, mainly due to a provisioning gap between IFRS 9 provisioning and CBSL provisioning requirements.
Subsequent to the recent rights issue, both the Tier 1 and Total CAR are estimated to stand at around 0% in Dec-20.
The rating also takes into account the proposed acquisition of Abans Finance PLC (AFP) by SCAP and its subsequent amalgamation with SFP; the combined entity is expected to witness improvement in capital position.
The Gross NPA ratio of the company deteriorated further to 28.8% in Sep-20 from 27.5% in Mar-20 (13.1% in Mar-19), while around 18% of the lending portfolio stood under moratorium as of Jan-21.
The ongoing repositioning of the portfolio away from unsecured SME loans and towards vehicle leasing, gold loans and factoring is expected to improve portfolio quality going forward, and has been factored into the rating.
The outlook on the company would be revised post-amalgamation with AFP. The outlook may be revised to ‘Stable’ in case the company is able to considerably augment its capital profile to reach a level above the regulatory requirement, along with improvement in its asset quality indicators.
The outlook may be revised to negative, if the capital profile continues to remain stretched and below regulatory requirements or in case of further weakening in its asset quality. Significant weakening in the credit profile of the Softlogic group, dilution in the ownership or lower than expected support from the group would also adversely impact the rating.