SINGER FINANCE (LANKA) PLC
Fitch Ratings has downgraded
The rating remains on Rating Watch Negative (RWN). Fitch has also downgraded SFL's outstanding senior unsecured debt to 'BBB+(lka)' from 'A-(lka)', and the outstanding subordinated unsecured debentures to 'BBB-(lka)' from 'BBB(lka)'. The RWN has also been maintained on SFL's debt ratings.
Key Rating Drivers
Weakening Parental Ability to Support: The downgrade of SFL's National Long-Term Rating stems from our view that a probable default on the sovereign's local currency obligations increases credit and funding or liquidity stresses for the financial sector, including SFL. This, together with the tight liquidity at its parent,
RWN Maintained: The RWN reflects the potential for SFL's creditworthiness relative to other entities on the Sri Lankan National Ratings scale to further deteriorate amid the likelihood of capital and funding stress as the default risk on domestic debt increases.
We see the funding and liquidity conditions of domestic finance and leasing companies (FLCs) as tied to those of the banks and therefore, any signs of funding or liquidity stress in the banking sector would carry contagion risk for FLCs. The RWN on SFL's rating reflects our view that SFL is not immune to these system-wide stresses, which will continue to exert pressure on the prospects for parental support.
Risks to Standalone Profile: We assess SFL's standalone credit profile to be weaker than its support-driven rating. SFL has constrained business prospects amid high borrowing rates and a weakened domestic economy, high debt/tangible equity of 5.4x at
Shareholder Support Underpins Rating: SFL's rating reflects Fitch' expectation of shareholder support from Singer, a consumer-durables retailer. The expectation of support is based on Singer's majority 80% shareholding in SFL, common branding and a record of equity injections into SFL. We believe that any required support for SFL could remain considerable in relation to Singer's ability to provide it, given the challenging operating environment.
Limited Importance to Parent: We regard SFL to be of limited importance to Singer because of SFL's low contribution to the group's core business and negligible synergies. This is evident in SFL's small share of lending within the group's ecosystem. Furthermore, SFL has low operational integration with the group, although the parent has increased its focus on SFL's strategic, long-term decision-making over the past few years and has meaningful representation on SFL's board, with three of the total eight directors coming from the parent group at
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SFL's rating is sensitive to changes in Singer's credit profile as well as Fitch's opinion around Singer's ability and propensity to extend timely extraordinary support.
Developments that could lead to negative rating action, including the possibility of a multiple-notch downgrade, include:
continued decline in Singer's liquidity position that further reduces its ability to provide any needed financial support to SFL;
increased size relative to the parent that makes extraordinary support more onerous for the parent;
insufficient or delayed liquidity support from Singer relative to SFL's needs, hindering SFL's ability to meet its obligations in a timely manner;
intervention by authorities that constrains Singer's ability to service its obligations.
The resolution of the RWN is contingent upon developments in the operating environment, the parent's credit profile and the evolution of the finance company's funding and liquidity position, which may take more than six months to emerge.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A significant positive turnaround in the parent's financial prospects could be positive for the ratings. However, there is a low probability of such action in the near term, as reflected in the RWN.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR UNSECURED DEBT
The rating on SFL's senior unsecured debt is in line with the National Long-Term Rating, as the debt constitutes unsubordinated obligations of the company.
SUBORDINATED UNSECURED DEBT
SFL's Sri Lankan rupee-denominated subordinated debentures are rated two notches below its National Long-Term Rating to reflect their subordination to senior unsecured obligations. Fitch's baseline notching of two notches for loss severity reflects our expectation of poor recovery. There is no additional notching for non-performance risk.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SFL's senior unsecured debt and subordinated unsecured debt ratings will move in tandem with the National Long-Term Rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
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