Fitch rates Seylan Bank’s Basel III sub debt ‘BBB+(lka)(EXP)’

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

The debentures will have tenors of five, seven and 10 years and carry fixed coupons.
Seylan Bank PLC this August said it would issue five and 10-year debentures to raise up to Rs.10 billion to strengthen its regulatory Tier II capital adequacy ratio, which was seen weakening amid growing risk weighted assets or the bank’s loan portfolio.
The debentures are to be listed on the Colombo Stock Exchange and the bank plans to use the proceeds to fund loan growth, strengthen its funding mix, reduce structural maturity mismatches and reduce its short-term borrowings.

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

Fitch rates the proposed Tier II instrument one notch below Seylan’s standalone rating to reflect the debentures’ subordinated status and higher loss-severity risks relative to senior unsecured instruments.

The debentures would convert to equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.

Seylan’s standalone rating, which is at the same level as its support-driven National Long-Term Rating of ‘A-(lka)’, is used as the anchor rating as we believe the bank’s standalone credit profile best indicates the risk of becoming non-viable. Fitch believes that state support cannot be relied upon to flow through to Seylan’s BASEL III-compliant debentures due to the instrument’s loss-absorption feature at the occurrence of the trigger event.

Fitch has not differentiated the notching on the proposed debentures from the notching on Seylan’s legacy Tier II debentures. This is because we assume that the authorities would step in late, moving the point of non-viability close to liquidation.

Fitch has not applied additional notching to the debentures for non-performance risk, in line with Fitch’s criteria, as they have no going-concern loss-absorption features. Seylan’s subordinated debenture ratings will move in tandem with its standalone rating, which is currently at the same level as its support-driven National Long Term Rating.
A downgrade of Seylan’s standalone rating could result from a large reversal in recent asset quality improvements, together with a weakening financial profile. An upgrade of Seylan’s rating would be contingent on further improvements in its standalone profile through improved asset quality and provisioning, mainly stemming from recovery of legacy non-performing loans, while maintaining its other credit metrics in line with higher-rated peers.