TRIS Rating has assigned a rating of “A-” to the proposed issue of up to Bt500 million in senior unsecured 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 unsecured debentures at “A-”. The outlook remains “stable”. The ratings reflect the company’s strong market position in the automobile operating lease segment and the proven ability of the management team to consistently expand the size of the lease portfolio. The ratings also reflect PL’s stringent credit risk management policies, which have enabled the company to maintain the quality of its assets. However, the ratings are moderated by intense competition and low prices for used cars. These two factors continue to be major constraints on PL’s profitability. In addition, PL’s capital structure will be affected if the company continues to use borrowings as its major source of funds to finance the expansion of its lease portfolio.
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 segment by diversifying its customer base, retaining its major customers, and maintaining the quality of its assets. PL’s financial performance is expected to be improved in 2015 by leveraging the strengths that come from its 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.
The credit upside is limited in the short to medium terms due to continued unsupportive domestic automobile market and unfavorable used car prices which remain a constraint on PL’s gains on sales of assets for lease and overall financial performance. Moreover, if PL could not maintain its financial performance and further deteriorates, the credit profile of PL could be negatively impacted.
PL has maintained its market-leading position as a provider of automobile operating leases. According to TRIS Rating’s database, in terms of net assets for lease, PL is the largest lessor 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 the first quarter of 2014, PL had net assets for lease of Bt9,616 million, rising from Bt9,188 million at the end of 2013, and from Bt7,875 million at the end of 2012. The amount of outstanding financial lease receivables also increased in 2013, rising to Bt1,631 million from Bt1,487 million in 2012. However, the outstanding financial lease receivables decreased, dropping to Bt1,456 million at the end of September 2014.
PL’s strong nationwide service network enhances its 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. The default risk has been mitigated by the relatively good credit quality of its 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 PL’s top 20 customers. 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 the first quarter of 2014. This is the same level as in 2013, but 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 their presence on 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 ratio of non-performing loans (NPLs, or loans overdue more than 90 days) to total loans at low levels. At the end of the first quarter of 2014, PL had no NPLs for operating lease receivables while the ratio of NPLs to outstanding financial lease receivables was only 0.31%.
In 2013, PL’s performance was constrained by lower prices for used cars. Lower prices for used cars meant PL obtained smaller gains from selling its assets for lease. Demand for used cars slumped in 2013 because the government awarded tax incentives to first-time car buyers. This program boosted the sale of new cars during 2012 and 2013. Aggressive marketing campaign from auto manufacturers in the late of last year also aggravated the decline of used car prices. PL has tried to reduce impact of low used car prices. For example, PL postponed the liquidation of some vehicles with expired contracts by renewing the leases and using the vehicles for short-term rentals. Normally, PL auctions off vehicles with expired contracts. PL has started selling the vehicles through a retail sales channel so as to receive higher prices than selling the vehicles at auction. Despite these efforts, 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. For the first nine months of 2014, PL reported net profit Bt97 million, compared with Bt158 million in the same period last year due to the impact of low used car price. The used car market is expected to bottom out soon, but a full recovery will take time. PL’s profitability may decrease further as a result. In addition, intense competition in both the automobile operating lease segment and the financial lease segment will continue to constrain PL’s profitability.
During the past three years, PL funded most of its growth with new borrowings. The leverage ratio, measured by the ratio of debt to equity, was 5 times at the end of the third quarter of 2014, up from 3.1 times in 2010. Looking ahead, profitability is expected to be remain constrained by intense competition and unfavorable used car prices. 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. It secures long-term borrowings to match the tenors of its lease contracts.
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