Security Leasing Company: coming out of bankruptcy?

The leasing company collapsed in the 2008 financial crisis, but has been consistently chipping away at restructuring their debts

It is truly a miracle that the Security Leasing Corporation Ltd (SLCL) has been alive as a company for as long as it has. In eight out of the 11 years between 2009 and 2020, the leasing company has recorded a loss after taxation. According to the most recent annual report for the year ending June 30, 2020, the accumulated loss stood at Rs566 million, while liabilities exceeded assets by Rs305 million. 

In fact, the independent auditors of the company in the report basically said that the company was beyond the realm of just ‘going concern assumption’. In its adverse opinion, the auditors said that “there is no sufficient appropriate audit evidence given that the management’s plans are feasible… in our opinion the going concern assumption used in the preparation of these financial statement is inappropriate and the company may not be able to realise its assets and discharge its liabilities in the normal course of business.”

Those are some sharp words. The auditors are effectively saying that, not only is the company bankrupt, but that there is no hope of coming out of bankruptcy. The report was released on September 30; and just one week later on October 6, the SECP had sent a letter to the company asking them to explain themselves. SLCL scrambled to justify their existence, and game plan, in a letter sent to the SECP on October 12. 

The SLCL was incorporated in December 1993 and began operations in May 1995. The company is Non-Banking Finance Company (NBFC) which engages in the business of leasing. It had a promising start: it was set up with the help of Merrill Lynch, and the Commonwealth Development Corporation, the UK development finance group. 

For a while, the company did well. Take a look at its financials before 2009. Its income grew from Rs207 million in 2004 to Rs557 million in 2008, while profit after taxation grew from Rs51 million to Rs212 million respectively. 

But then, the 2008 financial crisis hit. By the company’s own account: “SLCL was one of the leading leasing companies of Pakistan until 2008 when the entire leasing sector suffered a huge setback. As a result the lines of credit available to SLCL from banks which propelled the company’s entire operations, were suddenly choked, and the process of recovery of leases from the lessees also became much slower day by day.”

One can see this in the income and profit levels. The company’s total income fell from Rs 557 million in 2008, to Rs198 million in 2009, which was the same year the company recorded an astonishing loss of Rs358 million. In 2010, the company was hit with another loss of Rs274 million. 

Clearly, something had to change. According to SLCL, the company “continued to service its debt obligations to the creditors on time until 2011 when because of the difficult evolving situation it was left with no option but to enter into restructuring arrangements with the creditors.”

That helped, because total income just was completely collapsing in the process, going from Rs130 million in 2010 to Rs18 million in 2015. And in 2020, that figure stood at just Rs8 million (with loss at Rs44 million). 

According to SLCL, the total outstanding debt of the company as of 2008 stood at Rs2.4 billion, which was reduced to Rs 744 million by 2015. This was further decreased to Rs383 million as of June 2020. That can be be further subdivided into Rs231 million to the holders of Sukuk-II, Rs97 million to the Bank of Khyber, Rs39 million to the Bank of Punjab, and Rs16 million to Soneri Bank.  

How did the company do this? Well, ‘hard work’, it told the SEP, and by “reaching realistic settlement with the creditors based on 10% cash down payment in line with the company’s cash inflow”. 

So, what is the company’s game plan? SLCL has been in prolonged discussions for most of 2020 with the holders of Sukuk-II, finally deciding on a settlement with the 51% Sukuk holders on the basis of 10% cash down payment. “This will enable the company to clear the outstanding debt of Rs. 231.05 million in respect of Sukuk-II hopefully in the coming months.” says SCPL.

What is perhaps a little less concrete, and the cause of concern for the independent auditors, is everybody else. The company said it has reached an ‘agreement in principle’ with Soneri Bank “which is likely to take a couple of months to be formalized…furthermore we are also in negotiation with the Bank of Khyber for settlement of their dues on a realistic basis adopted in respect of other creditors.” 

To do this, the company’s board decided to sell off  properties in Lahore to pay off the outstandings of Sukuk-II, Bank of Khyber and Soneri Bank in the next few months, which is expected to generate a profit of Rs310.6 million.

This will radically change the picture of its profitability, equity, institutional indebtedness and liability,” the company noted a little optimistically in its letter. Note that there is no mention for the Rs39 million still to be paid off to the Bank of Punjab. 

And yet the company remains buoyant in the face of possible collapse, noting: “It will be appropriate to underline here that the central issue facing the company overtime has been the lack of injection of fresh equity into it which no new investor has been prepared to undertake, unless the company’s debt burden is reduced to the minimum for which we are confident that after settlement of company’s liabilities with the creditors, new investors will certainly show their interest in it.”

Or in plain English, give us a little more time. What’s a few more months, considering they’ve managed to hobble along for a decade?

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