Fitch rates DFCC’s Basel III Sub-Debt Issue ‘A+ (EXP)’

Wednesday, 31 January 2018 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings has assigned DFCC Bank PLC’s (DFCC, B+/AA-(lka)/Stable) proposed Sri Lanka rupee-denominated Basel III-compliant subordinated unsecured debentures an expected National Long-Term Rating of ‘A+(lka)(EXP)’.

The debentures, totalling Rs. 7 billion, will have maturities of five and seven years and carry fixed coupons. The debentures qualify as regulatory Tier II capital for the bank and include a non-viability clause. The bank plans to use the proceeds to support its loan-book expansion and strengthen its Tier II capital base. The debentures will be listed on the Colombo Stock Exchange.

The final rating is subject to the receipt of final documentation conforming to information already received.

Key rating drivers: Fitch rates the proposed Basel III Tier II notes one notch below the bank’s National Long-Term Rating of ‘AA-(lka)’. This reflects the notes’ higher loss-severity risks compared with senior unsecured instruments due to the notes’ subordinated status.

The notes include a non-viability clause whereby they would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

DFCC’s National Long-Term Rating is used as the anchor rating because the rating reflects the bank’s standalone financial strength.

Fitch believes the bank’s standalone credit profile best indicates the risk of becoming non-viable.

Fitch has not differentiated the notching on the proposed notes from the notching on DFCC’s legacy Tier II notes as it is assumed that the authorities would step in late, moving the point of non-viability close to liquidation.

Fitch has not applied additional notching to the notes for non-performance risk according to Fitch’s criteria, as the notes have no going-concern loss-absorption features.

DFCC’s ratings also reflect its developing commercial banking franchise and capitalisation, which is still high relative to rating peers.

Rating sensitivities: The rating of the notes would move in tandem with DFCC’s National Long-Term Rating.