Fitch revises expected rating on HNB Finance’s sub-debt issue to BBB+(EXP)

Nov 28, 2019 (LBO) – Fitch Ratings has revised the expected National Long-Term Rating on HNB Finance Limited’s (HFL, A(lka)/Stable) proposed Sri Lanka rupee-denominated subordinated unsecured debentures to ‘BBB+(EXP)(lka)’ from ‘A-(EXP)(lka)’ following the publication of Exposure Draft: Non-Bank Financial Institutions Rating Criteria and Exposure Draft: Bank Rating Criteria on 15 November 2019, under which the debentures are rated.

The proposed debentures total LKR2 billion with a maturity of five years and carry fixed coupons. The company plans to use the proceeds to strengthen its Tier II capital base and support loan-book expansion. The proposed debentures are to be listed on the Colombo Stock Exchange.

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

KEY RATING DRIVERS

The proposed subordinated debentures are rated two notches below HFL’s National Long-Term Rating in line with the exposure drafts to reflect Fitch’s expectation of poor recoveries arising from the proposed debentures’ subordinated status. Furthermore, we do not expect any regulatory action that would reduce losses on subordinated instruments.

HFL’s National Long-Term Rating was affirmed on 22 February 2019. The rating reflects Fitch’s expectation that support would be forthcoming from Hatton National Bank PLC (HNB, AA-(lka)/Stable), which owns 51% of HFL and is involved in HFL’s strategic direction through board representation and the common HNB brand. The two-notch rating differential between the two entities reflects HFL’s limited role in the group. HFL is engaged mainly in microfinance, which is not a major product for HNB. Furthermore, there is limited operational integration between the entities.

RATING SENSITIVITIES

The rating of the proposed notes will move in tandem with HFL’s National Long-Term Rating. The rating is also sensitive to divergence between the final Non-Bank Financial Institutions Rating Criteria and Bank Rating Criteria, when published, and the current exposure drafts.

HFL’s ratings are sensitive to changes in Fitch’s assessment of HNB’s ability and propensity to provide support.