Fitch rates Bank of Ceylon’s Basel III Sub-Debt ‘AA’

Fitch Ratings has assigned Bank of Ceylon’s (BOC, AA+(lka)/Stable) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated unsecured debentures a final National Long-Term Rating of ‘AA(lka)’.

The debentures, totalling up to Rs. 8 billion, are to have maturities of five and eight years, and carry fixed- and floating-rate coupons. The bank plans to use the proceeds to support its loan book expansion and to strengthen its Tier II capital base. The debentures are to be listed on the Colombo Stock Exchange.

The debentures are to qualify as Basel III compliant regulatory Tier II capital for the bank and include a non-viability trigger upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. The final terms indicate that the notes are subject to temporary or permanent write-down as determined by the Monetary Board of Sri Lanka and can be partially or fully written down upon the occurrence of a trigger event. There are no equity conversion provisions in the terms.

The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 26 October 2017.

Key Rating Drivers

BOC’s National Long-Term Rating, which reflects expectation of extraordinary support from the sovereign (Long-Term Issuer Default Rating: B+/Stable), is used as the anchor rating. This is because Fitch expects pre-emptive extraordinary support from the Government to prevent non-viability, given BOC’s strong state linkages and high systemic importance. Fitch has not differentiated the notching on the proposed notes from the notching on BOC’s legacy Tier II notes.

Fitch rates the proposed Basel III Tier II notes one notch below the bank’s National Long-Term Rating of ‘AA+(lka)’. The notching includes only one notch for loss severity, which reflects the notes’ higher loss-severity risks compared with senior unsecured instruments due to the notes’ subordinated status. 

Fitch has applied one notch, rather than two notches, for loss severity, as partial, and not solely full, write-down of the notes is possible. 

In Fitch’s view, there is some uncertainty as to the extent of losses the notes would face in case of a trigger event given that this would depend on the size of the operating losses incurred by the bank and any measures taken by the authorities to help restore the bank’s viability.

Fitch has not applied additional notching to the notes for non-performance risk according to Fitch’s criteria, as the notes have no going-concern loss-absorption features, and Fitch believes that write-down of the notes will only occur once the point of non-viability is reached.

Fitch sees the propensity for sovereign support for BOC as stemming from its high systemic importance, quasi-sovereign status, role as a key lender to the Government and full state-ownership, albeit constrained by the sovereign’s limited ability to extend support.

Rating sensitivities

The rating of the notes will move in tandem with BOC’s National Long-Term Rating.