(The following statement was released by the rating agency)
March 20 - Fitch Ratings has upgraded India-based ORIX Auto Infrastructure Services Limited’s (OAIS) National Long-Term rating to ‘Fitch A+(ind)’ from ‘Fitch A-(ind)’ and removed it from Rating Watch Evolving (RWE). The Outlook is Stable. A full rating breakdown is provided at the end of this rating commentary
The upgrade reflects stronger legal linkages between OAIS and its parent ORIX Corporation, after the latter in December 2011 increased its stake in OAIS to near 100%. Following the increased ownership, Fitch expects ORIX to guarantee a significant portion of OAIS’s loans in the near future. Further, ORIX injected INR500m equity in January 2012 in OAIS and expects to inject a further INR1,300m in OAIS Auto Financial Services Limited, a wholly owned subsidiary of OAIS. The ratings benefit from tangible and potential support from ORIX.
Using a top-down approach in the agency’s Parent Subsidiary Rating Linkage criteria, Fitch has notched down OAIS’s rating from ORIX’s rating based on the strong legal and moderate strategic and operational linkages between the two entities.
The operational linkages are illustrated by ORIX’s control of OAIS’s Board of Directors, with four out of nine Directors also on the Board of ORIX Australia. ORIX Australia management is closely involved in the daily operation of OAIS. All major functions including the treasury and finance activities of OAIS are reported on a monthly basis to ORIX. Technological upgrades and financial reporting integration are also underway to align them with the processes of ORIX.
The ratings are constrained by OAIS’s small size of operations compared with that of ORIX, which limits the extent of strategic linkages between the two companies. The ratings are also constrained by the short history of support by ORIX. Further, Fitch notes that on a net basis, the company continued to post a net loss in the year ended March 2011 (FY11) and in 9MFY12.
The ratings may benefit from improvement in the credit profile of ORIX and/or strengthening of linkages between ORIX and OAIS. Conversely, deterioration in the credit profile of ORIX and/or weakening of linkages between OAIS and ORIX may weigh on the ratings.
OAIS reported revenue of INR2,075m with an EBITDA margin of 36.4% for 9MFY12. The company’s net leverage (based on annualised EBITDA) was 4.85x compared with 4.5x in FY11. ORIX increased its stake in OAIS to 99.98% (from 30.3%) by purchasing the shares from Infrastructure Leasing & Financial Services Limited (‘Fitch AAA(ind)'/Stable) and its group entity, IL&FS Employees Welfare Trust. Subsequent to announcement of acquisition, Fitch had placed the ratings of OAIS on RWE on 23 September 2011.
The following facilities of OAIS have also been upgraded:
- INR1,641.65m (increased from INR1,135.2m) long-term loans: upgraded to ‘Fitch A+(ind)’ from ‘Fitch A-(ind)'; off RWE
- INR1,100m (reduced from INR1,150m) short-term loans: upgraded to ‘Fitch A1+(ind)’ from ‘Fitch A1(ind)'; off RWE
- INR100m non-fund based limits: upgraded to ‘Fitch A1+(ind)’ from ‘Fitch A1(ind)'; off RWE
- INR1,873m (increased from INR1,523m) fund-based limits: upgraded to ‘Fitch A+(ind)'/‘Fitch A1+(ind)’ from ‘Fitch A-(ind)'/ ‘Fitch A1(ind)'; off RWE