Fitch Ratings has affirmed Melsta Regal Finance Ltd’s (MRF) national long-term rating at ‘A+(lka)’. The outlook is stable.
MRF’s rating reflects Fitch’s expectation of support from its ultimate parent, Distilleries Company of Sri Lanka (DIST; AAA(lka)/Stable).
MRF is rated four notches lower than DIST due to MRF’s insignificant role in the group. MRF has limited synergies with the group’s core business, a low level of operational integration and a lack of a common brand with the group.
MRF accounted for just 1.3 percent of group revenue and 1.1 percent of consolidated net profit in the nine months to December 2014. Although not planned, the disposal of MRF would not materially alter the group’s operations or earnings.
Working capital finance remains one of MRF’s core products, accounting for about 50 percent of new advances. This includes financing to DIST suppliers and customers. At end-December 2014, trade finance and factoring accounted for 43 percent of MRF’s loan book, followed by leases and hire-purchase loans at 36 percent and loans and advances at 21 percent.
DIST has full effective ownership of MRF through Melstacorp Limited (ML), the investment holding company for DIST’s non-beverage assets. DIST is represented on MRF’s board and has demonstrated support through equity infusions, the last of which occurred at end-March 2014 to finance growth.
DIST’s ability to support the entity is based on its market leadership in alcoholic beverage production in Sri Lanka, a highly profitable sector characterised by relatively stable demand through economic cycles and high entry barriers.
MRF is a licensed finance company that commenced commercial operations in October 2012.
MRF’s rating may be downgraded if there is a decline in 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.
An upgrade of MRF’s rating would only result from an increase in DIST’s willingness to provide support as DIST’s ratings are already at the top of the national rating scale. Narrower notching could result from MRF’s stronger operational integration or higher importance to the group through stronger linkages, aligned management, shared brand, larger scale, greater synergies or higher profit contribution.
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