Fitch affirms DSP Merrill Lynch Capital

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Fitch affirms DSP Merrill Lynch Capital

This article was posted on Mar 1, 2008 and is filed under Press Releases

Fitch Ratings has today affirmed DSP Merrill Lynch Capital Limited (DSPMLC)’s INR15bn guaranteed long-term debenture programme at National Long-term ‘AAA(ind)(SO) and its INR2.5bn short-term debt programme at National Short-term ‘F1+(ind)’.

DSPMLC’s National Long-term rating is based on the guarantee extended by its ultimate parent, Merrill Lynch and Co., Inc (ML, Long-term foreign currency Issuer Default Rating (IDR) ‘A+’/ Negative Outlook), which is currently rated five notches above the Indian sovereign (Long-term foreign currency IDR ‘BBB-‘ (BBB minus)/Outlook Stable). The National Short-term rating does not have an explicit guarantee and is based on DSPMLC’s strong liquidity backed by its parent’s support.

Asset finance currently makes up almost half of DSPMLC’s business where the emphasis is on acquisition and trading of retail portfolios originated by finance companies and banks in India, although it originates some higher-ticket corporate deals on its own. This is supported by securities-based lending and investment/proprietary trading.

Given the highly competitive nature of the Indian securitisation (including direct assignment) market that is dominated by banks, the profitability of DSPMLC’s asset finance business is expected to be closely aligned with that of banks (median NIM: 3% in FY07) as long as securitised assets comprise the majority of its asset finance portfolio. Although market-linked activities like securities-based lending and proprietary trading are expected to provide significant support to DSPMLC’s return on asset (RoA, 2.05% in FY07) in buoyant market conditions, Fitch notes that this business is inherently cyclical. Fee income is negligible and the company’s RoA could get stressed if credit losses on its portfolios (acquired via assignments) were to increase, since they are not marked to market.

DSPMLC’s current delinquencies are nil and most of its portfolios have significant over-collateralisation (10-15% for non-consumer loan portfolios; 30-40% in consumer loans). Given the recent uptrend in delinquencies in consumer loans which comprise a significant part of its portfolio, it is unlikely that DSPMLC’s acquired pools would remain completely insulated from such credit losses. Delinquencies in its self-originated portfolios are also expected to rise as the portfolio seasons. However, Fitch takes some comfort from DSPMLC’s ability to actively sell-down its acquired portfolio through bilateral deals. On its self-originated portfolio the company’s policy of risk-based pricing, aggressive monitoring, early recognition of NPLs and write-offs based on an assessment of recovery potential mitigates a potential sharp rise in delinquencies. Consequently, Fitch does not expect a significant rise in credit losses over the next 12-18 months.

The company is adequately capitalised (capital adequacy ratio 17.37% in December 2007) to fund business growth for the next 12-18 months due to recent capital infusions by ML. Continuity of such support would come into focus given the adverse impact on ML of the recent turmoil in international capital markets.

DSPMLC’s asset book is largely funded with matching or longer-term liabilities. While the company does not match to maturity assets held for trading (less than 20% of its loan book), its overall asset-liability position is positive and further backed by INR22bn of bank lines (average usage less than 50%).

Started in 2005 as the asset finance business of DSPML, DSPMLC is wholly-owned by DSPML which is in turn 90%-owned by ML. DSPMLC’s business is concentrated around four distinct business lines, namely: asset-backed finance (which involves self-originated and portfolio acquired for trading), securities-backed lending, IPO funding and proprietary trading.

Sourced From: Sampark Public Relations Pvt Ltd

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