(The following statement was released by the rating agency)
Dec 07 -
Summary analysis -- Ricoh Leasing Co. Ltd. ------------------------ 07-Dec-2012
CREDIT RATING: A/Negative/A-1 Country: Japan
Primary SIC: Equipment rental
& leasing, nec
Credit Rating History:
Local currency Foreign currency
07-Feb-2012 A/A-1 A/A-1
28-Oct-2004 A+/A-1 A+/A-1
Our ratings on Ricoh Leasing Co. Ltd. reflect its position as a captive finance arm of the Ricoh group under our rating analysis. Standard & Poor’s Ratings Services’ ratings are thus equal to those on the parent company, Ricoh Co. Ltd. (A/Negative/A-1). The ratings also reflect its relatively stable asset quality backed by its small-lot leasing contracts and adequate capitalization relative to its financial risk. However, these strengths are partly offset by the company’s limited business scale and market share, compared with domestic major leasing companies, as well as its high concentration on a certain business.
Ricoh Leasing is a leasing company in the Ricoh group and promotes Ricoh products. Ricoh, the parent company, owns a 46.85% stake in the company (as of March 31, 2012) and is its largest shareholder. In our view, Ricoh Leasing has strong capital and management integration with its parent and group entities: four of five directors are from the parent company. Moreover, we consider the company’s strategic importance within the group to be high, given that it finances about 70% of the group’s business streams, including the leasing of Ricoh products. As such, we view Ricoh Leasing as a captive finance company of the Ricoh group in our rating analysis. All of the group companies in Japan now use Ricoh Leasing’s cash management system, Ricoh Cash Management System (RCMS), which plays an important role in the group’s cash management.
Ricoh Leasing’s consolidated total assets amounted to JPY676.8 billion as of the end of the first half of fiscal 2012 (ended Sept. 30, 2012). The company follows a basic management policy of developing business only in Japan, with 21 head and branch offices and service offices across the country. Its core businesses are leasing, rental, and installment sales, which generate about 90% of total sales. These businesses involve office and information technology (IT) equipment, including photocopy and fax machines. Other than these core businesses, the company also provides financial services, such as financing to corporations and individuals, and accounts receivable collection services, from which it earns commissions. Leasing contracts are diversified into small lots, mainly involving small and midsize enterprises (SMEs) that constitute the majority of the company’s customers. Ricoh Leasing offers lease financing for a large portion of Ricoh products, such as copiers, fax machines, and other office equipment, which enables the company to maintain a solid business franchise, on the back of the competitive edge of Ricoh products. Although Ricoh Leasing’s market share is relatively small at around 4% to 5% in terms of transaction volume, we expect the company to steadily maintain its business volume, supported by its effective use of the group’s sales network and its strength in securing business deals with SMEs.
Ricoh Leasing maintains good asset quality, because the company focuses on its leasing business while its investment and loan businesses account for only a small portion of its entire business mix. The company’s ratio of credit losses to average operating assets for the first half of fiscal 2012 (from April 1 to Sept. 30, 2012) was 0.28%. The ratio has been showing a gradual decline after it rose to 0.71% in fiscal 2009 (ended March 31, 2010), when the economy weakened. The improvement is due in part to positive effects from the enforcement of the SME Financing Facilitation Act in December 2009, which eased some eligibility requirements for restructured loans extended to SMEs. In line with the law, Ricoh Leasing’s lease receivables were partly reclassified to performing from nonperforming, and this contributed to a decrease in its credit losses. Ricoh Leasing’s credit costs have also been decreasing. The ratio of credit costs to operating receivables (mainly lease and loan receivables) stood at 0.07% in fiscal 2011, marking a substantial drop from 1.00% in fiscal 2010, when the Great East Japan Earthquake in March 2011 had driven up credit costs. Although the company’s operating receivables may come under pressure to some extent after the SME Financing Facilitation Act expires in March 2013, Standard & Poor’s expects the impact of the legislation’s expiration to be limited. We hold that view because the company’s operating receivables are diversified into relatively small lots; and it adopts adequate credit assessment criteria based on a scoring system to manage its credit risk.
In fiscal 2011, Ricoh Leasing’s operating assets started to increase mainly because reconstruction demand from the earthquake boosted the transaction volume of leasing and installment sales businesses. The company’s sales slightly increased to JPY230.6 billion from JPY229.7 billion in the previous year. Its operating profit surged to JPY16.8 billion from JPY12.2 billion in fiscal 2010 and net income ballooned to JPY9.4 billion from JPY7.0 billion, mainly due to a large decline in credit costs. Return on assets (ROA) rose 0.37 percentage points year on year to 1.50%, which remains higher than those of other rated leasing companies. Standard & Poor’s holds the view that Ricoh Leasing can generate relatively stable earnings in fiscal 2012 and beyond. We base this view on the company’s solid and stable business franchise, which is underpinned by a steady volume of demand for lease and installment sales that Ricoh’s high brand recognition has sustained, as well as Ricoh Leasing’s adequate risk management. In the first half of fiscal 2012, the company’s operating assets continued to grow and sales edged higher year on year. Conversely, operating profit slightly shrank from the previous year due to a lower gross margin in its leasing business.
Ricoh Leasing maintains its capital at an adequate level relative to its financial risk. The company’s capital adequacy ratio improved 0.6 percentage point year on year to 17.1% as of the end of fiscal 2011, mainly due to an increase in retained earnings. This ratio is relatively high among rated domestic leasing companies. Should credit risks or risk volume increase as a result of more aggressive investments by Ricoh Leasing, it will be important for the company to maintain an adequate balance between risk volume and capital/earnings that is commensurate with the rating, in our view.
Ricoh Leasing maintains stable liquidity by diversifying its financing resources. The company maintains favorable relationships with banks, life insurers, and other domestic financial institutions, and it uses direct financing from capital markets through the issuance of bonds, commercial papers, and securitized offerings. Deposits made through the group’s cash management system are also one of the company’s most important financing resources. Deposits from group companies declined in fiscal 2011, and therefore, Ricoh Leasing made up the decrease with bank borrowing, commercial paper issuance and securitized offerings. The ratio of direct financing from capital markets accounted for 45% of the company’s debt (excluding deposits from group companies) as of March 31, 2012. Although the outstanding commercial paper stood at JPY50 billion as of Sept. 30, 2012, they are backed by unused credit lines. Therefore, Standard & Poor’s is not particularly concerned about the company’s liquidity.
The negative outlook reflects that on its parent, Ricoh Co. Ltd. In our rating analysis, we view Ricoh Leasing as a captive finance arm of the Ricoh group, given its close operational and financial (including equity capital) ties with its parent and other affiliated Ricoh group companies. For this reason, Standard & Poor’s views the ratings on Ricoh Leasing as equal to those on its parent. It is thus highly likely that we could lower the ratings on Ricoh Leasing if we were to downgrade the parent company. At the same time, if we see the relationship between Ricoh Leasing and its parent weaken, we may lower the ratings given that they reflect our stand-alone credit assessment of Ricoh Leasing. Conversely, if we were to revise upward the outlook on Ricoh, we are also highly likely to carry out an upward outlook revision on Ricoh Leasing.
Related Criteria And Research
-- Captive Finance Operations, April 17, 2007
-- Rating Finance Companies, March 18, 2004