By Modupe Gbadeyanka
Global Credit Ratings (GCR) has upgraded the long term national scale issuer rating assigned to C&I Leasing Plc to BBB(NG) and affirmed the short term at A3(NG); with the outlook accorded as stable. According to a statement issued by the local rating agency, the above credit ratings were accorded to C&I Leasing Plc after taking into cognisance of C&I’s well-entrenched position in key markets, as borne out by a relatively strong client retention and progression in market share amidst challenging operating conditions.
It explained that the repositioning of the group’s business focus on strongly performing segments has also supported sound traction in the operating lease space, with performance expected to show resilience through the cycle.
Having registered sound top line growth (at a compound rate of 10.2%) over the four years under review, the group achieved a 43% annualised increase in revenue in 3Q FY17, on the back of new vessel leasing contracts.
The EBITDA margin has shown moderate variability over the review period, with transient compression seen in FY16 offset by the traction from higher-yielding leases secured in the current year.
Specifically, the margin rebounded to 34.7% in 3Q FY17, well above a four-year average of 27.5%, and is projected at 36.2% for the full year.
GCR is cognisant of pressure that could arise from traction in the operating lease profile, which could cause margin volatility, should management fail to manage the residual risk inherent in these contracts effectively.
Accordingly, progress will continue to be monitored closely to assess the repackaging of the underlying assets into new contracts or their disposal to maintain a robust earnings stream or efficiently recycle capital through the cycle, the rating firm said.
Adjusting performance for sizeable distortions arising from cross currency exposures and changes in valuations reveals the moderate cash generative capabilities of C&I’s operations.
That said, note is taken of the capital intensity of the trading cycle and the sizeable debt servicing outflows. GCR has considered the ample untapped facilities that are in place, the strength of the financing counterparties, the risk transfer in respect to the finance leases and sound performance of the leasing book.
As with most lease financing entities, the Group is relatively thinly capitalised. In comparison, debt has risen markedly from just N11bn at FY13 to N29bn at 3Q FY17 to finance the rapidly advancing operating lease exposure, which has seen gross and net gearing trend at high levels, over the review period, closing 3Q FY17 at 435.6% and 413.9% respectively (FY16: 441%; 423%).
That said, earnings based gearing metrics are relatively comfortable for the Group’s operating model, registering at 369% and 350% on a gross and net basis respectively at 3Q FY17 (FY16: 540%; 519%). Coupled with the expected resilience of cash earnings expected over the rating horizon, this gives comfort in spite of the relatively erratic interest coverage metrics.
A significant improvement in profitability metrics, asset quality and gearing could result to a positive rating action.
However, material weakening in profitability, debt to EBITDA or pressure on debt service due to unforeseen fall off in business volumes or deterioration in operating conditions. Furthermore, marked deterioration in asset quality would warrant rating action, GCR noted.
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