Sept 24, 2013 (LBO) – A proposed US dollar bond by Sri Lanka’s DFCC Bank has been given an expected ‘B+ (EXP)’ rating by Fitch. The ratings agency said DFCC has a satisfactory risk profile, good project finance track-record and strong capital ratios.
DFCC is expected to sell a 250 million US dollar bond in international markets.
The full statement is reproduced below:-
Fitch Ratings-Colombo/Hong Kong/Singapore-24 September 2013: Fitch Ratings has assigned Sri Lanka-based DFCC Bank (DFCC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of ‘B+’ with Stable Outlooks.
Fitch has also assigned DFCC a ‘b+’ Viability Rating (VR), a Support Rating (SR) of ‘4’, and Support Rating Floor (SRF) of ‘B’.
Fitch has also assigned DFCC’s proposed issue of USD denominated notes an expected rating of ‘B+(EXP)’. A full list of rating actions is provided at the end of this commentary.
The final rating of the USD notes is contingent upon receipt of final documents conforming to information already received.
Rating Action Rationale
The Long Term IDRs and VR reflect DFCC’s satisfactory risk profile, its good project finance track-record and strong capital ratios. Counterbalancing factors are the group’s expanding commercial banking business conducted through its 99% subsidiary, DFCC Vardhana Bank (DVB), which has a higher risk profile given that these activities are believed to be, at least initially, less profitable than peers’ given its weaker franchise as a relatively new entrant. The IDRs and VR also take into account DFCC’s exposure to Sri Lanka (BB-/Stable) and risks relating to its developing and relatively weaker regulatory, legal, and operational environment. This includes a potential cyclical deterioration in DFCC’s asset quality, lower profitability and volatile loan growth. The SR of ‘4’ and SRF of ‘B’ reflect Fitch’s expectations of somewhat limited extraordinary support from the state, given the latter’s own fiscal challenges as reflected in its ‘BB-‘ rating, and DFCC’s lower systemic importance than larger government banks or larger systemically important banks. Fitch is of the view that there is a special relationship with the government stemming from DFCC’s role as a specialised project lender; DFCC being encouraged to issue foreign currency debt by the government; and the government’s indirect holding of about 35% of the voting shares of DFCC.
The notes are rated at the same level as DFCC’s Long-Term Foreign Currency IDR as they constitute unsecured and unsubordinated obligations of the issuer.
Fitch is of the view that the senior unsecured creditors of DFCC on a standalone basis and the senior unsecured creditors of DVB on a standalone basis are likely to rank equally, and consequently are rated at the same level as the consolidated group.
In line with Fitch’s criteria, Recovery Ratings are assigned to entities with an IDR of ‘B+’ or below. Fitch has assigned a Recovery Rating of ‘RR4’ to the notes to reflect average recovery prospects of 31% -50% for unsecured creditors in case of default under both a standalone and consolidated basis.
An upgrade of DFCC’s IDRs and VR is unlikely over medium-term given Fitch’s expectation for the direction of the group’s risk profile and potential lower capitalisation. The IDRs and VR could be downgraded if there is a sustained and substantial weakening in DFCC’s credit profile, together with a material decline in its capital position and other loss absorption indicators.
The SR and SRF are sensitive to the sovereign’s ability and propensity to provide timely support, particularly if the sovereign rating were to change.
Any change in DFCC’s IDRs would impact the rating of the proposed USD notes.
A full list of DFCC’s ratings:
Long-Term Foreign- and Local-Currency IDRs assigned at ‘B+’; Stable Outlook
Proposed USD senior unsecured notes assigned at ‘B+(EXP)’;Recovery Rating assigned at ‘RR4’
Short-term Foreign Currency IDR assigned at ‘B’
Viability rating assigned at ‘b+’
Support Rating assigned at ‘4’
Support Rating Floor assigned at ‘B’
National Long-Term Rating:’AA-(lka)’; Outlook Stable
Senior unsecured debentures:AA-(lka)’
Subordinated debentures: ‘A+(lka)’