The merger is expected to be wrapped up by April 01, 2013, subject to shareholder approval.
"The Rating Watch Positive indicates that PF's rating will be upgraded to align with PLFP's rating upon the successful conclusion of the merger," Fitch Ratings said.
"The potential upgrade underlines the elimination of administrative difficulties and regulatory restrictions (such as maximum single party exposures) that could currently impede the flow of support from PLFP to PF."
Peoples Leasing and Finance is a unit of state-run People's Bank.The full statement is reproduced below
Fitch Places People's Finance on Rating Watch Positive on Merger Announcement
Fitch Ratings-Colombo/Seoul/Singapore-23 November 2012: Fitch Ratings has placed Sri-Lanka-based People's Finance PLC (PF) 'A(lka)' National Long-Term Rating on Rating Watch Positive, on its planned merger with its 88% parent - People's Leasing and Finance PLC (PLFP, 'B+'/'AA-(lka)'/Stable). The agency has simultaneously affirmed PLFP's ratings. A full list of ratings is provided at the end of this commentary.
The upcoming merger is a precondition imposed on PLFP by the regulator as a consequence of granting it with a license to operate as a finance company. PLFP expects to complete the merger by 1 April 2013, subject to shareholder approval. Fitch will resolve the Rating Watch upon the conclusion of the merger.
The Rating Watch Positive indicates that PF's rating will be upgraded to align with PLFP's rating upon the successful conclusion of the merger. The potential upgrade underlines the elimination of administrative difficulties and regulatory restrictions (such as maximum single party exposures) that could currently impede the flow of support from PLFP to PF.
The affirmation of PLFP's ratings with Stable Outlook reflect Fitch's view that the linkages with its state-owned parent People's Bank (PB, 'AA+(lka)'/Stable) will remain the same upon the conclusion of the intended merger.
The ratings of PLFP and PF continue to reflect Fitch's expectations of extraordinary support available from PB and PLFP respectively, given PLFP's close integration with, and strategic importance to, PB, and PF's strategic importance to, and integration with, PLFP.
Both PLFP and PF are strongly associated with the People's Bank brand. PB's majority ownership of PLFP (75%) and PF (effectively 66.5% held through PLFP) also supports the ratings.
The two-notch differential between the ratings of PB and PLFP, and of PLFP and PF, currently reflect potential impediments to the flow of support usually seen in layered support structures.
PB's ability to support its subsidiaries in turn stems from the government of Sri Lanka's own credit strength. Fitch believes it is highly likely that government support could flow through to PLFP via PB, and to PF via PLFP, due to the above linkages and the consequent reputation risk to the government if PLFP or PF should fail.
Changes to PB's ratings may result in corresponding changes to PLFP's ratings, provided that the linkages between PB and PLFP remain intact. PLFP's ratings may be downgraded if PB gives up its controlling stake, or if its strategic importance to PB diminishes over time. The same is true of PLFP's and PF's ratings.
Further details on PB, PLFP, and PF are available on www.fitchratings.com and www.fitchratings.lk.
Long-Term Foreign Currency Issuer Default Rating affirmed at 'B+'; Outlook Stable
Long-Term Local Currency Issuer Default Rating affirmed at 'B+'; Outlook Stable
National Long-Term rating affirmed at 'AA-(lka)'; Outlook Stable
LKR1.48bn outstanding senior unsecured redeemable debentures affirmed at 'AA-(lka)'
LKR3bn outstanding rated commercial paper affirmed at 'F1+(lka)'
National Long-term rating: 'A(lka)' on Rating Watch Positive
Corrected - upgraded to 'AA-(lka)'