Tris Rating gives Asia Capital Group Plc (ACAP) a BB, as the firm is constrained by its short track record as a lender, high concentration risk, high leverage and potential rises in funding and liquidity risk.
ACAP's target customers typically have higher credit risk and face a liquidity shortage, especially when the economy is weak. ACAP has a limited number of clients, meaning just a few loan defaults could translate into greater credit risk for the company relative to lenders with a more diversified customer base.
ACAP could face a liquidity shortage in the future because it has a small base of borrowers and limited sources of funds. A negative gap in assets and liabilities may arise should some of its large customers fail to make loan payments or if it takes a long time for ACAP to liquidate the collateral given by the borrowers.
At the end of March, assets and liabilities still showed a positive gap. Total assets were 5.6 billion baht, compared with total borrowings of 4.18 billion baht. About two-thirds of borrowings are due within one year. As of March, ACAP did not have any available credit facilities to cover a potential mismatch in assets and liabilities.
At present, the company relies primarily on its equity base and the issuance of debentures and bills of exchange (B/Es) to small groups of investors through private placements. At the end of March 2018, the amount of outstanding debentures was 3.78 billion baht. B/Es, including short-term borrowings from a related party, were 400 million baht.
The company has no credit lines from banks or other financial institutions. Apart from liquidity risk, the limited sources of funding drive up the funding cost. A potential rise in funding cost could narrow the net interest spread.
Since ACAP started the lending operation, two borrowers have failed to repay their loans. The borrowers promptly transferred collateral worth 326 million baht in aggregate to ACAP to settle 305 million baht in outstanding loans.
The bad loans from these two customers accounted for about 7% of total loans at the end of March. Under the current accounting standards, ACAP has not been required to classify the loans or set aside any loan-loss provisions.
Tris Rating believes that if ACAP starts classifying loans and reporting delinquent loans, it may eventually need to follow the provisioning standards that apply to more established non-bank lenders.
Due to its short track record, ACAP needs time to demonstrate that it has the ability to handle a growing loan portfolio and maintain an acceptable level of loan quality.
The stable outlook is based on the expectation that ACAP's financial performance will gradually improve.
