According to Fitch, Melsta Regal’s rating reflects that extraordinary support available for it from its ultimate parent, Distilleries Company of Sri Lanka PLC in case of need.
The agency says, this is based on its strong linkages with Distilleries and growing synergies with Distillery group and related companies.
Below is the full rating release issued by Fitch.
Fitch Ratings-Colombo-21 May 2013: Fitch Ratings has assigned Sri Lanka-based Melsta Regal Finance Ltd (Melsta Regal) a National Long-Term rating of ‘A+(lka)’. The Outlook is Stable.
Rating Action Rationale
Melsta Regal’s rating reflects Fitch’s view that extraordinary support will be available from its ultimate parent, Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Stable, 100% ownership) in case of need. This is based on its strong linkages with DIST and growing synergies with DIST group and related companies. Further details on DIST’s rating are available on www.fitchratings.com and www.fitchratings.lk.
The four-notch difference between the ratings of DIST and Melsta Regal reflects the latter’s limited strategic importance to the DIST group at present. Fitch will consider narrowing the notching-difference between the companies if Melsta Regal’s strategic importance to the DIST group were to increase – for example through greater synergies and common-creditor relationships.
Key Rating Drivers
Key linkages include DIST’s full ownership of and board representation at Melsta Regal, as well as its involvement in the strategic direction of the latter, through DIST’s 100%-owned investment holding company subsidiary Melstacorp Limited (ML). In 2012 Melsta Regal received a capital injection of LKR672m from ML which was funded by DIST as part of its group restructuring, which resulted in the consolidation of its subsidiaries directly under ML.
Over the long-term, DIST expects its financial services segment – which comprises Melsta Regal and Continental Insurance Limited – to be the key growth driver for the group, apart from its core alcoholic beverage segment. In this respect, Melsta Regal expects to cross-sell its products to customers and suppliers of the DIST group and related companies, particularly via its trade financing- and working capital financing products.
Melsta Regal is a licensed finance company which commenced commercial operations in October 2012. As of 31 March 2013 total assets amounted to LKR765m, and post-tax profits were LKR22m. Short-term debt factoring and working capital financing loans amounted to almost 60% of its advances, with the remainder comprising finance leases and hire-purchase contracts used for vehicle financing.
Melsta Regal’s focus on mostly short-term lending products keeps its interest rate and refinancing risks low. This is because the majority of its funding is in the form of deposits, which typically mature or re-price in less than a year.
A weakening of DIST’s ability to provide support, as reflected in a downgrade of its rating, will result in a downgrade of Melsta Regal’s rating. A weakening of the linkages between DIST and Melsta Regal, including but not limited to a substantial reduction in DIST’s ownership, could also result in a widening of the notching between the two companies through a downgrade of Melsta Regal.
Stronger linkages between Melsta Regal and DIST, or an increase in Melsta Regal’s strategic importance to the DIST group, could result in narrower notching between the two companies through an upgrade of Melsta Regal.