Fitch downgrades five Lankan finance and leasing companies’ ratings; maintains RWN

Fitch Ratings has downgraded the National Long-Term Ratings of five Sri Lankan finance and leasing companies (FLCs) after the recent sovereign downgrade and recalibration of the agency’s Sri Lankan National Rating scale. 

The FLCs’ ratings remain on Rating Watch Negative (RWN). The downgrades follow similar action on 10 Sri Lankan banks. For details, see “Fitch Downgrades 10 Sri Lankan Banks’ Ratings”, dated 12 January.

The recalibration of the national scale is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch’s downgrade of Sri Lanka’s Long-Term Local Currency Issuer Default Rating (IDR) to ‘CC’ from ‘CCC’/Under Criteria Observation on 1 December 2022. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC+’ or below.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales. 

The recalibration of the Sri Lankan National Rating scale has resulted in downgrades of the National Long-Term Ratings of the following Fitch rated FLCs:

• People’s Leasing and Finance PLC (PLC) to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN

• Central Finance Company PLC (CF) to ‘A-(lka)’/RWN from ‘A+(lka)’/RWN

• CBC Finance LTD (CBCF) to ‘BBB+(lka)’/RWN from ‘A(lka)’/RWN

• HNB Finance PLC (HNBF) to ‘BBB+(lka)’/RWN from ‘A(lka)’/RWN

• Siyapatha Finance PLC (Siyapatha) to ‘BBB+(lka)’/RWN from ‘A(lka)’/RWN

The National Ratings of other Sri Lankan FLCs, which are not mentioned in this commentary, have not been affected by the recalibration. Still, their credit profiles generally remain exposed to heightened downside risks in the current operating environment.

The downgrades of the National Ratings of PLC and CF are driven by the downgrade of the sovereign’s Long-Term Local-Currency IDR and the recalibration of the Sri Lankan National Rating scale. They also reflect their relative creditworthiness among Sri Lankan issuers, including the larger banks. 

A probable default on the sovereign’s local-currency obligations increases the risk that authorities will impose restrictions on FLCs servicing their local-currency obligations, like for the banks. That said, we believe that this risk is lower than non-payment by the sovereign.

The downgrades of CBCF, HNBF and Siyapatha stem from the downgrades of their bank parents ─ Commercial Bank of Ceylon PLC (A(lka)/RWN), Hatton National Bank PLC (A(lka)/RWN) and Sampath Bank PLC (A(lka)/RWN), respectively ─ due to the recalibration of the bank parents’ National Ratings. These FLCs remain rated two notches below their respective parents’ ratings, reflecting the finance subsidiaries’ limited importance to their bank parents.

“We have maintained the National Ratings of PLC and CF on RWN, in line with the RWN on other standalone-driven Sri Lankan banks and FLCs. This reflects the potential for further credit deterioration on the Sri Lankan National Ratings scale as sovereign local-currency default risk rises and economic pressures intensify. The RWN on CBCF, HNBF and Siyapatha reflect those of their parents,” Fitch added.