LRA reaffirms BB1 /NP ratings of Ceylinco Investment & Realty

LRA has reaffirmed Ceylinco Investments and Realty Ltd’s (“CIR” or “the Company”) long- and short-term ratings of BB1 and NP, respectively. At the same time, the outlook on the long-term rating has been revised from stable to negative.

The ratings reflect the Company’s weakening asset quality, frail financial performance and low capitalisation. The negative outlook is premised on LRA’s concerns about the escalating interest-rate-environment, which could adversely affect the asset quality and demand for real-estate projects.

CIR derives franchise as a member of Ceylinco Consolidated. This is reflected by its deposit base, which stood at Rs 1.88 billion as at end-December 2006. However, as it lacks the branch network to effectively compete in the loan based products, the Company depends on property-related business. CIR’s fortunes depend mainly on 2 large projects: a joint venture with a related company to construct a shopping and apartment complex in Nawala; and a holiday-villa housing scheme in Belidoowa (part of Ruskin island in Panadura). The former is projected to have a gross development value (“GDV”) of Rs 3 billion (of which CIR has a 40%-stake) while the Belidoowa project’s GDV has yet to be finalised as it is still in its pre-design stage. Meanwhile, the financial performance has remained fragile with bulky overheads continuing to strain its bottom line. Consequently, its return on equity (“ROE”) and return on assets (“ROA”) stood at just 5.01% and 0.53%, respectively, as at end-FYE March 2006 (“FY Mar 2006”).

The quality of the lending portfolio has also deteriorated, from a gross non-performing-loan (“NPL”) ratio of 3.86% as at end-FY Mar 2005 to 5.04% as at end-December 2006. LRA also notes that about 5% of CIR’s loans and advances are to related companies, representing 36.89% of its core capital. Meanwhile, on the funding side, CIR is exposed to significant asset-liability mismatches. LRA’s concern about such differences is exacerbated by the increasing interest rates, which could adversely affect the margins. Further, asset-liability management becomes even more delicate with CIR’s large exposure in real estate which tends to be lumpy and illiquid.

CIR’s overall capital-adequacy ratio stood at 10.10% as at end-FY Mar 2006. Although this is slightly above the statutory minimum, LRA considers the capital adequacy to be marginal given its weakening asset quality and high exposure to property stocks.

LRA is a domestic credit rating agency licensed by the Securities and Exchange Commission of Sri Lanka. LRA is a 100%-owned subsidiary of RAM Holdings Berhad (“RAM”), Malaysia’s premier rating agency. RAM is also an affiliate of Standard & Poor’s, the world’s largest rating agency.