Fitch rates Seylan Bank’s Basel III Sub Debt Final ‘BBB+’

Monday, 12 March 2018 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings has assigned Seylan Bank Plc’s (A-(lka)/Stable) proposed Basel III-compliant subordinated debentures a National Long-Term Rating of ‘BBB+(lka)’.

The final rating is the same as the expected rating assigned on 16 October 2017, and follows the receipt of documents conforming to information already received.

The debentures, totalling up to Rs. 10 billion, are to have maturities of five, seven and 10 years, and carry fixed coupons. The notes include a non-viability clause and will qualify as Basel III-compliant regulatory Tier 2 capital for the bank. The bank plans to use the proceeds to fund loan growth and to strengthen its funding and Tier 2 capital bases. The debentures are to be listed on the Colombo Stock Exchange.

Key rating drivers

Fitch rates the proposed Tier 2 instrument one notch below the bank’s National Long-Term Rating of ‘A-(lka)’ to reflect the notes’ subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

Seylan’s National Long-Term Rating is used as the anchor rating because the rating reflects the bank’s standalone financial strength. Fitch believes that the 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 Seylan’s legacy Tier 2 notes. This is because it assumes 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, in line with Fitch’s criteria, as they have no going-concern loss-absorption features and Fitch believes that write-down of the notes will only occur once the point of non-viability is reached.

Rating sensitivities

The rating of the notes will move in tandem with Seylan’s National Long-Term Rating.