Dialog Axiata PLC could invest half a billion rupees annually in its finance company subsidiary to stay above the minimum regulatory capital needs, although that will not pressure the leverage or the rating of the parent company due to its higher debt and rating headroom, according to Fitch Ratings.
Fitch Ratings last week said the groups with finance company subsidiaries would have to infuse more capital, which could mostly come in the form of debt to sustain their medium term asset growth, but that could pressure their group entity ratings as they have little headroom for debt in relation to their equity.
While the most pressure could be felt on Singer Sri Lanka PLC from its finance company subsidiary, Singer Finance Lanka PLC, Abans PLC could also be affected to a lesser degree from Abans Finance PLC, although the pressure on its leverage and the ratings could ease should the planned sale of the latter materialises.
Unlike Singer Sri Lanka PLC and Abans PLC, Dialog Axiata PLC has higher debt and rating headroom to fund Dialog Finance PLC’s debt and deposit funded expansion plan in financial technology.
The company has ‘AA’ rating from Fitch with a Stable outlook.
“We have assumed a Rs.500 million annual equity infusion from Dialog to Dialog Finance PLC for the subsidiary to maintain its regulatory capital requirements”, Fitch Ratings said.
During the three months ended March 31, 2021, Dialog Finance PLC reported a net loss of Rs.27.7 million, down from Rs.72.4 million reported for the same period in 2020.
By the end of March 2021, the company had a core capital of Rs.2.0 billion.
Last year, considering the impact from the pandemic-induced economic challenges, the Central Bank extended time till January 1, 2022 for finance companies to meet the minimum regulatory core capital of Rs.2.5 billion, which was earlier raised from Rs.2.0 billion.
Given the current core capital level at the company, Dialog Finance could raise another Rs.500 million this year as part of their broader capital augmentation plan.
The company raised Rs.764.1 million and Rs.701.3 million in 2019 and 2020 via rights issues. The company has assets worth Rs.3.2 billion.
“We believe Dialog’s leverage impact will be negligible even if Dialog Finance PLC’s debt to tangible equity rises up to 10.0x (2020: 0.6x) as the parent’s operations are large relative to Dialog Finance PLC’s assets,” Fitch Rating said.