TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt500 million in senior debentures of Phatra Leasing PLC (PL). At the same time, TRIS Rating has affirmed the company rating of PL and the ratings of its current senior debentures at “A-”. The outlook remains “stable”. The ratings reflect the company’s strong market position in the automobile operating lease industry and the proven ability of the management team to consistently expand the lease portfolio. The ratings also reflect PL’s stringent credit risk and residual risk management systems, which have enabled the company to maintain the quality of its assets and reflect the recurring income PL earns from selling assets after the lease contracts expire. The ratings also take into consideration the increasing demand from corporations to outsource their automobile maintenance service needs. However, the ratings have been mitigated by intense competition, which will continue to be a major constraint on PL’s profitability. In addition, a growing lease portfolio, financed with additional borrowed funds, will weaken the company’s capital structure. The “stable” outlook reflects PL’s continual improvements in its risk management systems and business profile, its strong market position, and the support it receives from its major shareholder. The company is expected to be able to maintain its leading position in the automobile operating lease industry by diversifying its customer base, retaining its major customers, maintaining the quality of its assets, and improving its financial performance by leveraging the strengths that come from a market-leading position. The company is also expected to improve its capital base to keep its leverage ratio in line with TRIS Rating’s expectation.
PL continues to maintain its market-leading position as a provider of automobile operating leases. According to TRIS Rating’s database, the company is the largest lessor in the industry. PL’s net assets for lease is the highest among the 30 large auto lease providers. The company renders both operating leases and financial leases to medium-sized and large companies. At the end of 2013, PL had net assets for lease of Bt9,188 million, up 16.7% from Bt7,875 million at the end of 2012. The amount of outstanding financial lease receivables also increased, rising to Bt1,631 million in 2013 from Bt1,487 million at the end of 2012.
A strong nationwide service network enhances PL’s ability to service large customers. The reliance on large customers benefits PL because of economies of scale. However, relying on large customers means PL is exposed to customer concentration risk, both in terms of default risk and revenue dependency risk. However, the default risk has been mitigated by the relatively good credit quality of the large customers. PL has been trying to diversify its customer base. One way to measure the success of this effort is to see the percentage of business derived from PLs’ top 20 customers. The net assets for lease for operating leases and outstanding loans for financial leases, summed across the top 20 customers, comprised approximately 40% of PL’s total portfolio in 2013. This represents a sizeable drop from 56% in 2009. In addition, PL’s top 20 customers are now diversified across a wider range of industries.
Muangthai Life Assurance Co., Ltd. (MTL) became PL’s major shareholder in 2006. Since that time, the representatives from MTL, through PL’s board of directors, have implicitly supported PL’s efforts to improve its risk management systems. PL’s efforts to control its asset quality are supported by stringent risk management systems, especially when PL leases assets which carry higher risks than automobiles. The efforts to control asset quality have kept the ratios of non-performing loans (NPLs: overdue more than 90 days) to total loans at low levels. At the end of 2013, PL had no NPLs for operating lease receivables while the ratio of NPLs to outstanding financial lease receivables was only 0.01%.
In 2013, PL’s performance was constrained by lower prices for used cars. Demand for used cars slump in 2013 because government tax incentives for first-time car buyers encouraged the sale of new cars during 2012-2013. Lower prices for used cars meant PL obtained smaller gains from the sales of assets for lease. In addition, PL postponed the liquidation of some expired contract vehicles. As a result, gains from the sales of assets for lease dropped to only Bt49 million in 2013 from Bt124 million in 2012. Net profit dropped to Bt205 million in 2013, compared with Bt241 million in 2012. The used car market is expected to recover in the second half of 2014 and PL’s gains from the sales of assets for lease are expected to rebound. PL’s profitability should improve as a result. However, intense competition in both the automobile operating lease and the financial lease segments will continue to constrain PL’s profitability.
During the past three years, PL funded most of its asset growth by borrowing. The leverage ratio, measured by the ratio of debt to equity, was 4.8 times at the end of 2013, up from 3.1 times in 2010. Looking ahead, profitability is expected to be constrained by intense competition. Thus, the leverage ratio is expected to deteriorate. TRIS Rating expects to see PL strive to enhance its operating performance and control its leverage ratio. PL has maintained a stringent asset and liability management policy by securing long-term borrowings to match the tenors of its lease contracts.
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