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LRA Assigns Instrument Entity Rating to Asia Asset Finance PLC LKR 01Bn Asset Backed Secured Debenture (1)

Rating Type Debt Instrument
(27-Jan-23 )
Action Initial
Long Term A
Outlook Stable
Rating Watch -

Rating of debentures highlights asset-backed secured structure. The debentures are secured by 120% of gold loans in selected branches with a lien in name of the trustee. Ratings take comfort from the fact that most of the loans which are used as security behind have an LTV of ~70% and the Company has the ability to auction gold as soon as LTV reaches 90% or payments are delayed. Consequently, debentures are rated one notch above the entity. As an entity, Asia Asset Finance PLC (the Company or AAF) is a licensed finance company primarily focusing on Gold Loans in Sri Lanka. The ratings reflect strong sponsor support from Muthoot Finance. Muthoot Finance is a leading Gold loan provider in India with over 80 years of experience and has continued to provide both technical and financial support to the Company. Strong technical support in terms of audits and operations from Muthoot finance, lowers operational risk and improves performance. Despite better operational efficiencies in recent years, overall profitability remains low a factor of lower net interest margins due to lower margin yielding gold loans. The Company has lower credit risk owing to a higher concentration of asset-backed gold loans although the legacy book of unsecured leasing keeps the gross NPL number higher at ~10%. On the other hand, 67% of the book consists of gold loan which has an NPL of only ~0.02% and LTV of ~77%. The Company plans to increase its share in gold loans to up to 90% which is expected to further improve credit quality. In terms of the loan book, the majority of the book is in short term and helped the Company to roll over once the interest rate has been hiked suddenly. Ratings reflect strong capitalization highlighted by equity which remains above the required LKR 2.5Bn and the Capital Adequacy Ratio which was 25.44% as at 1HFY23 and 27.77% in FY22 which is well above the requirement.
The rating is dependent on the management's ability to navigate its way through unpredictable macroeconomic conditions while maintaining regulatory requirements and preserving asset quality. Stability in the shareholding and support from Muthoot finance will remain critical for the ratings.

About the Entity
Asia Asset Finance PLC is a public limited liability company incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange. In 2014 AAF was acquired by MFL of India and it had a 72.92% stake in the Company as of FY22. The principal activities of AAF comprise Gold Loans, SME Loans, Leasing, Micro Finance, Personal Loans, and Pledge Loans. The Board of Directors consists of eight members of which three are Non-Independent and Non- Executives Directors and four are Independent and Non-Executive Directors. The remaining is the Chief Executive Officer, Mr. Rajiv Gunawardena, who heads the management team and he has held the current position as the CEO for about 12 years.

About the Instrument
AAF has issued LKR 1Bn, listed, rated, secured (asset-backed), redeemable debentures each worth LKR 100 in 2020 with tenure of three years. The debentures are secured against Gold Loan facilities of certain branches up to 120% of the face value. The debenture has two types namely, i) Type A, ii) Type B. Type A has a fixed coupon rate is 10.28% (annual) and type B carries a floating coupon rate of 1 year T.Bill rate plus 3.75% (annual). The first coupon payment started in October 2021 and the last payment will go out in October 2023 along with the bullet payment.

The primary function of LRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. LRA comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. LRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.