MARC Ratings has assigned ratings of AA/MARC-1 to Pac Lease Berhad’s Medium-Term Notes (MTN) programme and Commercial Papers (CP) programme with a combined aggregate limit of RM1.5 billion. The ratings outlook is stable.

The assigned ratings factor in the lengthy track record and market position of Pac Lease in the domestic industrial hire purchase sector, its sound asset quality metrics, broad operating margin, and low leverage position. The long-term rating also incorporates a one-notch uplift premised on the shareholder’s covenant that Pac Lease will remain as an indirect wholly-owned subsidiary of Singapore-based Oversea-Chinese Banking Corporation Limited (OCBC Bank) throughout the programmes and would receive operational and financial support from the OCBC Group if needed. The key moderating factors to the ratings are its modest asset size and heavy reliance on external borrowings to fund its operations.

 

For 1H2022, loan portfolio registered a 5.3% y-o-y growth to RM2.1 billion, reflecting improving demand for hire purchase facilities for capital equipment and machinery as well as working capital financing on the back of strengthening economic conditions. Its loan exposure to key economic sectors, namely construction and property (23.3%), business services (23.1%), manufacturing (21.5%), and transport and storage (14.7%), remains fairly diversified. In addition to hire purchase financing, Pac Lease provides term loans to SMEs, which accounted for about 14.3% of its portfolio as at end-1H2022.

 

Gross impaired loans (GIL) of RM21.4 million remain low, translating to a GIL ratio of 1.02% in 1H2022 (1H2021: 1.00%). Notwithstanding this, economic recovery remains challenging, particularly for the SME sector, that could lead to asset quality weakness going forward. Strong net interest margin, which stood at 5.80% as at end-1H2022, however, provides a buffer against impacts on asset quality.

Interest income was unchanged y-o-y at RM81.8 million while pre-tax profit grew 17.6% y-o-y to RM60.9 million in 1H2022, mainly owing to write-back of allowance of RM14.1 million (1H2021: RM4.7 million). Its ROA and ROE stood at 2.16% and 8.02% (1H2021: 1.94%; 7.65%). Pac Lease’s hire purchase, term loan and other financing operations are mainly funded through wholesale borrowings from banks (39.0% as at end-1H2022), issuance of CP (22.9%) and MTN (15.5%), and credit lines from Cagamas Berhad (22.6%). The arrangement between Pac Lease and Cagamas enables the former to sell its hire purchase and leasing debts on a recourse basis. 

Of its total borrowings of RM1.5 billion as at end-1H2022, about 72% were short-term which poses liquidity and refinancing risks. These risks are substantially mitigated by its status as a member of the OCBC Group, which would provide ready access to funding. The initial drawdown is expected to be between RM400.0 million and RM600.0 million under the RM1.5 billion issuance programme, which will be largely utilised for refinancing. Its debt-to-equity (DE) ratio of 2.48x is expected to remain unchanged, well below its prudential limit.

The stable rating outlook assumes Pac Lease will broadly maintain its asset quality and profitability metrics over the next 12-18 months.

No rating upgrade is envisaged in the near term. Any rating upgrade would be guided by sustained increase in Pac Lease’s loan book size while maintaining strong asset quality metrics.

Negative pressure could develop on deterioration in the company’s financial metrics, particularly asset quality, and/or a sharp increase in leverage levels from expectations.