TRIS Rating has affirmed the rating of Thai ORIX Leasing Co., Ltd.’s (TOLC) guaranteed debentures at “AA+”. The outlook remains “negative”. The debentures are fully guaranteed by TOLC’s parent company, ORIX Corporation (ORIX) in Japan, a company rated “A-” with a “negative” outlook by S&P Global Ratings and rated “Baa1” with a “stable” outlook by Moody’s Investors Service (Moody’s). The rating of the guaranteed debentures assigned by TRIS Rating is based on the credit quality of the guarantor and the unconditional and irrevocable guarantee of the debentures.
Under the guarantee agreement, which is governed by the laws of Japan, the guarantor unconditionally and irrevocably guarantees to promptly make payment to the debentureholders of all sums payable by TOLC under the obligations of the rated debentures, in the event that TOLC has no ability to pay. In addition, if there is any merger or consolidation of ORIX, the successor of ORIX shall assume these guaranteed obligations. In case the guarantor fails to pay the amount due after receiving notice, the debentureholders’ representative can commence legal action against the guarantor in court in Japan for the amount in default. The guarantee cannot be amended or terminated without the unanimous consent of the debentureholders.
The rating of ORIX, the guarantor, is supported by its strong business profile. ORIX’s key strengths are its diverse lines of business and sources of earnings. ORIX depends on the capital markets as its source of funds. However, ORIX has a number of financing sources which mitigate the risk of an overreliance on the capital markets for the funds it needs.
The “negative” outlook for TOLC’s guaranteed debentures reflects the expected decline in creditworthiness of its guarantor, ORIX, which has received international scale ratings of “A-” with a “negative” outlook from S&P Global Ratings and “Baa1” with a “stable” outlook from Moody’s. The prolonged weakness in the Japanese economy is expected to constrain ORIX’s profitability and is likely to affect its creditworthiness.
The ratings and/or outlook for TOLC’s guaranteed debentures could be revised upward or downward, should there be any changes in ORIX’s creditworthiness.
ORIX was established in 1964 through the cooperation of five financial institutions and three trading companies. ORIX was a pioneer in the Japanese leasing industry. Through more than 50 years of operation, ORIX has diversified its product offerings and now offers a broad range of financial services in addition to leasing services. At the end of June 2016, ORIX’s total assets were 11 trillion yen, decreasing 2% from the end of fiscal year 2015 (FY2015). ORIX’s total assets were composed of 2.6 trillion yen in installment loans (24% of total assets), 2.2 trillion yen in investments in securities (20%), 1.3 trillion yen in investments in operating leases (12%), and 1 trillion yen in investments in direct financing leases (11%).
ORIX has six lines of business: Corporate Financial Services, Maintenance Leasing, Real Estate, Investment and Operation, Retail, and Overseas Business. After the financial crisis in 2008-2009, ORIX’s reduced its exposure to real estate assets since they are highly volatile and subject to adverse changes in the economy. The amount of assets in ORIX’s Real Estate segment fell continuously, dropping from 1,856 billion yen in FY2009, or 26.6% of total segment assets, to 706 billion yen at the end of June 2016, or 8% of total segment assets. The Overseas Business segment has expanded substantially after the financial crisis to compensate for the reduction in the amount of assets in the Real Estate segment. The amount of assets in the Overseas Business segment soared by 49.6%, rising from 1.3 trillion yen at the end of FY2013 to 2 trillion yen at the end of FY2014 due to the acquisition of Robeco Groep N.V., an asset management company in the Netherlands, in FY2014. As a result, total segment assets rose from 6.1 trillion yen at the end of FY2012 to 7.3 trillion yen at the end of FY2014 and then jumped to 9.3 trillion yen at the end of December 2014 after an acquisition. ORIX began to consolidate Hartford Life Insurance K.K. in the Retail segment during the second quarter of FY2015. At the end of June 2016, in terms of segment assets, the Retail segment constituted 39.5% of segment assets, followed by the Overseas Business segment (24.1%), Corporate Financial Services (12.1%), Real Estate (8.2%), Maintenance Leasing (8.2%), and Investment and Operation (7.9%).
Diversification has helped ORIX avoid losses despite the financial crisis. Net income began to recover after ORIX shifted its focus to business segments which offer higher returns. Net income climbed from 36.5 billion yen in FY2010 and improved substantially to 260.2 billion yen in FY2016, the seven consecutive years of growth. ORIX reported net income of Bt76.8 billion yen for the first quarter of FY2017. The return on average assets also improved continuously, climbing from 0.99% in FY2012 to 2.82% in the first quarter of FY2017. ORIX has maintained its stringent liquidity policy by holding an adequate cash balance and having unused committed credit facilities sufficient to cover the repayment of its marketable short-term debts. The liquidity coverage ratio was 360% at the end of June 2016.
ORIX has focused more on its operations in Thailand through its subsidiary, TOLC. ORIX and TOLC see good prospects in the machinery and equipment leasing segment and the auto maintenance leasing segment in Thailand. TOLC has a long track record as a machinery and equipment leasing company in Thailand. The company was established in 1978 through a cooperative effort by ORIX, Industrial Finance Corporation of Thailand (IFCT), Asia Credit PLC, and Bangkok Insurance PLC (BKI). There have been several shareholding changes during these past decades, due to mergers and acquisitions by the Thai shareholders. In 2010, ORIX restructured its business in Thailand by combining TOLC and an auto maintenance leasing company, ORIX Auto Leasing (Thailand) Co., Ltd. (OATC), into a new entity. The old name, TOLC, was used as the name of the new company. Currently, ORIX holds 96.6% of TOLC, while the remaining 3.4% is held by BKI.
TOLC renders two services in two main lines of business: machinery and equipment leasing, and auto maintenance leasing. At the end of FY2016, TOLC’s operating assets totaled Bt17,799 million. The value of TOLC’s operating assets has increased slightly by around 1% from FY2015. The operating assets comprise loans or receivables in the machinery and equipment leasing segment, and net assets for lease in the maintenance auto leasing segment. Machinery and equipment leases constituted 61% of TOLC’s operating assets at the end of FY2016. The recent slump in used car prices has affected TOLC’s financial performance since FY2014. Net profit dropped to Bt198 million in FY2014, to Bt195 million in FY2015 but slightly increased to Bt214 million in FY2016. For TOLC’s financial leases, the ratio of non-performing loans (NPLs) to total loans has dropped continuously, sliding from 3.7% at the end of FY2011 to 1% at the end of FY2014. The economic slowdown pushed the NPL ratio up to 3% at the end of FY2016 but the current level of NPLs is expected to be manageable.
ORIX has shown a strong commitment to TOLC. It provides business and financial support, including know-how in the areas of operations, risk management, and product innovation, to TOLC. The strong support from ORIX is expected to continue for the foreseeable future.
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