Fitch Ratings-Colombo/Hong Kong-21 May 2014: Fitch Ratings has affirmed Melsta Regal Finance
Ltd's (MRF) National Long-Term rating at 'A+(lka)'. The Outlook is Stable.
KEY RATING DRIVERS
MRF's rating reflects Fitch's expectation that support would be forthcoming from its ultimate
parent, the Distilleries Company of Sri Lanka PLC (DIST; AAA(lka)/Stable). Fitch classifies MRF
as being of limited importance to DIST, which results in a rating differential of four notches.
The agency's assessment is based on DIST's full effective ownership of MRF through its 100%
stake in investment holding company Melstacorp Limited, which holds all non-beverage sector
assets of the group. It addition, DIST has representation on MRF's board, and has demonstrated
support in the form of regular equity infusions, a back-up credit line and the provision of letters
of comfort for borrowings. The assessment however, also reflects MRF's still insignificant role in
the group, the low level of operational integration, the absence of a common brand and
relatively small contribution to group profit (0.6% in the nine months ending December 2013.
Fitch is of the view that linkages between the entities could increase over the medium term as
MRF, a licensed finance company, increases its scale through actively taking part in the
financial sector consolidation. The authorities also require MRF to increase its capital base to
LKR1.5bn by end-2017 (LKR1.1bn at end March 2014). In addition MRF is required to list by end-
2014 with an expected public shareholding of around 20%. Fitch believes that DIST will continue
to retain a majority stake.
MRF has expanded quickly since it started commercial operations in October 2012 as part of
DIST group and Fitch expects that it will continue to growth rapidly. Short-term debt factoring
and working capital finance remain MRF's core products, accounting for approximately 60% of
advances in the financial year ending March 2014, with the remainder comprising mainly
finance leases and hire purchase vehicle finance.
DIST's ability to support MRF stems from its market leadership in the cash generative domestic
alcoholic beverage sector, with profitability supported by relatively stable demand for spirits
though economic cycles, and high entry barriers as a result of regulation.