Lanka Rating Upgrades Instrument Rating of Commercial Credit and Finance PLC - LKR 1.3bn Guaranteed Debenture

Commercial Credit and Finance PLC (CCFP or "the Company") is a licensed finance company (LFC) in Sri Lanka, specializing in hire purchase, finance leases, and gold loans. CCFP is a medium-sized company in the leasing industry with ~5.5% share in terms of assets and ~6.1% in deposits. The rating reflects the Company's sound profitability, extensive outreach and growing asset base. However, the Company endured alarmingly high non-performing loans (NPLs) recently emanating from moratoriums and relaxations granted to customers during COVID-19 pandemic and economic crisis period. As at 9MFY25, the Company's Gross and Net NPLs rose to approximately ~30.0% and ~19.1%, respectively, surpassing the industry averages of around ~11.3% and ~6.9%. The management has focused exclusively on recovery efforts and other measures to reduce this number. As a result, NPLs are expected to come down to ~18.2% by March 31, 2025. The rating watch signifies criticality of this matter. The net interest income (NII) of the Company increased to LKR~11.2bn in 9MFY25 from LKR~8.3bn in the same period last year due to lower interest expenses and relatively high yield on assets. The Company was able to sustain its profitability to LKR~2.1bn in 9MFY25 (9MFY24: LKR~2.0bn) despite higher impairment charges of LKR~3.1bn (9MFY24: LKR~1.2bn). The Capital Adequacy Ratio (CAR) of the Company stood at ~15.4% in 9MFY25, well above the regulatory requirement and it is expected to increase to ~20% as the Company intends to issue subordinated loan of LKR~1.5bn to strengthen its Tier II capital. The liquidation of the Company's second-largest shareholder, Group Lease Holdings PTE Limited, as ordered by the Singapore court in March 2024, is not expected to affect CCFP materially. However, any negative repercussions from this would have negative rating impact. The rating of the Debenture reflects its guaranteed structure. These are guaranteed by Hatton National bank to the tune of LKR~2.3bn, being the principal sum and two interest payments.
The Debenture rating is contingent on the continual written guarantee from Hatton National Bank. Any changes in HNB's rating or the removal of the guarantee will commensurately impact the Debenture rating.

About the Entity
Commercial Credit and Finance PLC was established as a limited liability company in 1982 under the provisions of the Companies Ordinance No. 17 of 1982 and later re-registered under the Companies Act No. 07 of 2007. In 2011, CCFP was listed on the Colombo Stock Exchange (CSE). The main shareholder is B. G. Investments (Pvt) Ltd (50.25%) and is governed by a Board of Directors comprising ten members. The CEO, Mr. R. S. Egodage, is supported by a capable management team.

About the Instrument
The Company issued LKR~1,287mn Senior, Listed, Redeemable, Rated, Guaranteed Debentures with maximum tenor of five years. The Debenture was opened for subscription on 24th February 2021 and closed on 24th February 2021. The objective of the issue was to provide the necessary stable funding for 5 years and more and to further expand the lending portfolio of the entity. The Debenture is guaranteed by Hatton National bank in form of a letter of guarantee, for LKR~2.3bn, being the principal sum and two interest payments at ~9.00% per annum payable annually, for two interest periods on the said Debentures. The maturity date of Debenture is 4 March 2026.