Sri Lanka’s Bank of Ceylon to sell 5-year ‘AA(lka) rated bonds

Sept 20, 2012 (LBO) – A five year subordinated bond sale by state-run Bank of Ceylon’s of up to 6 billion rupees has been rated ‘AA(lka)’ one notch below the entity’s national rating of ‘AA+(lka)’, Fitch Ratings said. The bonds will be used to boost the bank’s Tier II capital base.

Fitch said Bank of Ceylon’s rating reflected expected support from the state and its high systemic importance as one of the main bankers to the government and the country’s largest state-owned bank.

Any change in Sri Lanka’s sovereign rating is likely to reflect on the rating of the bank, Fitch said.

The proposed debentures will pay either fixed or floating rates and will be listed on the Colombo stock exchange.

The full statement is reproduced below

Fitch Rates Bank of Ceylon’s Subordinated Debt ‘AA(lka)’

Fitch Ratings-Colombo/Seoul/Singapore-20 September 2012: Fitch Ratings Lanka has assigned Bank of Ceylon’s (BOC; ‘BB-‘/Stable) proposed subordinated debentures of up to LKR6bn a National Long-Term rating of ‘AA(lka)’. A full rating breakdown is provided at the end of this commentary.

BOC’s ratings reflect Fitch’s expectation of support from the government of Sri Lanka (GoSL, ‘BB-‘/Stable), if required. This is based on its quasi sovereign status, high systemic importance and role as one of the main bankers to the government. BOC is the largest bank in Sri Lanka and fully owned by GoSL. The Viability ‘b+’ Rating (VR) reflects BOC’s weak capitalisation, improving profitability, increasing loan/deposit ratio and concentration in the public sector. The VR also reflects its domestic franchise being underpinned by its sovereign linkages and extensive branch network.

Any change in Sri Lanka’s sovereign ratings would likely be reflected in the ratings of BOC. An upgrade of BOC’s National Long-Term rating may also result from demonstrated preferential support for BOC. The VR may be upgraded if BOC enhances its capital buffer substantially (including a high loan loss reserve coverage); if the loan-deposit ratio is maintained at 80%-85%, supplemented by medium-term wholesale funding; and if its operating performance and asset quality remain stable. The VR may be downgraded if capital buffer weakens from continued high asset growth, or if a large asset quality downturn from domestic/external macroeconomic shocks leads to capital impairment.

The proposed debentures are rated one notch below BOC’s National Long-Term rating to reflect their subordinated status. The proposed debentures will have a maturity of five years, with principal repayment as a bullet payment on maturity while coupon payments will be at fixed or floating rates, and do not contain any deferral clauses.

The debentures are to be listed on the Colombo Stock Exchange.The issue is aimed at strengthening BOC’s Tier 2 capital base.

BOC’s ratings:

Long-Term Foreign Currency Issuer Default Rating: ‘BB-‘; Outlook Stable

Long-Term Local Currency Issuer Default Rating: ‘BB-‘; Outlook Stable

USD senior unsecured notes: ‘BB-‘

Viability Rating: ‘b+’

Support Rating: ‘3’

Support Rating Floor: ‘BB-‘

National Long-Term Rating: ‘AA+(lka)’; Outlook Stable

Subordinated debentures: ‘AA(lka)’