(Repeat for additional subscribers)
May 21 (The following statement was released by the rating agency)
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.
MRF's rating may be downgraded if there is a change to DIST's ability or
propensity to provide support. This may stem from a downgrade of DIST's National
Long-Term rating, or weakening linkages between DIST and MRF.
Fitch may consider narrowing the notching between the two entities should
synergies, such as the provision of working capital products to DIST's suppliers
and customers, materialise, thereby enhancing its role within the group. In
addition, an increase in MRF's strategic importance through stronger linkages
with the DIST group, higher profit contribution or common brand recognition
could lead to an upgrade.