Sri Lanka’s MCSL to sell Rs500mn subordinated debt

Nov 29, 2013 (LBO) – Sri Lanka’s MCSL Financial Services is planning a 500 million rupee subordinated debt issue, which has been rated ‘BBB-(lka)’ Fitch ratings said.

MFSL’s National Long-Term Rating could be revised in the event of a change in the willingness and/or ability of BOC to support the company. This would include any significant changes in BOC’s effective shareholding or board control.

In line with its criteria ‘Rating FI subsidiaries and Holding Companies’ Fitch classified MCSL as being of limited importance to BOC due to a lack of strategic rationale to the group, negligible profit and asset contribution, and absence of operational integration. The ratings are based on expected support from its ultimate parent, state-run Bank of Ceylon which is rated AA+.

The 5-year debt will help boost Tier 2 regulatory capital, expand lending and reduce maturity mis-matches, Fitch said.

The full statement is reproduced below:-

Fitch Rates MCSL Financial Services’ Proposed Debt ‘BBB-(lka)(EXP)’ Ratings Endorsement Policy

28 Nov 2013 4:48 AM (EST) Fitch Ratings-Colombo/Singapore-28 November 2013: : Fitch Ratings has assigned MCSL Financial Services Limited’s (MFSL, BBB(lka)/Stable) proposed subordinated redeemable debentures of up to LKR500m an expected National Long-Term Rating of ‘BBB-(lka)(EXP)’.

The issue is expected to have a tenor of five years, with fixed-rate coupon payments. The debentures are to be listed on the Colombo Stock Exchange. MFSL expects to use the proceeds to strengthen its regulatory Tier 2 capital to support the expansion of asset base, minimise the maturity mismatch in assets and liabilities, and fund growth.

The final rating is contingent on receipt of final documentation conforming to information already received.

KEY RATING DRIVERS

Fitch has anchored the issue rating on MFSL’s National Long-Term Rating to reflect the agency’s view that support from parent Bank of Ceylon (BOC, AA+(lka)/Stable) will be available to the subordinated obligations. BOC effectively owns 80% of MFSL, has representation on the subsidiary’s board and is associated with its franchise. BOC has also extended a credit line to MFSL.

The issue rating has been notched down one level from MFSL’s National Long-Term Rating to reflect the notes’ below-average recovery expectations in the event of liquidation given their subordination to senior unsecured instruments, in line with Fitch’s criteria for rating such securities.

RATING SENSITIVITIES

The subordinated debt rating will move in tandem with MFSL’s rating.