Fitch rates DFCC’s Basel III Sub Debt final ‘A+’

Fitch Ratings has assigned DFCC Bank PLC’s (B+/AA-(lka)/Stable) proposed Basel III-compliant subordinated debentures a final National Long-Term Rating of ‘A+(lka)’. 

The final rating is the same as the expected rating assigned on 29 January and follows the receipt of documents conforming to information already received. 

The debentures, totalling up to Rs. 7 billion, are to have maturities of five and seven years, and carry fixed coupons. The notes include a non-viability clause and will qualify as regulatory Tier 2 capital for the bank. The bank plans to use the proceeds to support its balance sheet growth and to improve its capital adequacy in light of new regulatory requirements. 

Key rating drivers 

Fitch rates the proposed Tier 2 instrument one notch below the bank’s National Long-Term Rating of ‘AA-(lka)’ to reflect the notes’ subordinated status and higher loss-severity risks relative to senior unsecured instruments. The notes would convert to equity upon the occurrence of a trigger event as determined by the Monetary Board of Sri Lanka. 

DFCC’s National Long-Term Rating is used as the anchor rating because the rating reflects the bank’s standalone financial strength. Fitch believes that the bank’s standalone credit profile best indicates the risk of becoming non-viable. 

Fitch has not differentiated the notching on the proposed notes from the notching on DFCC’s legacy Tier 2 notes as we assume that the authorities would step in late, moving the point of non-viability close to liquidation. 

Fitch has not applied additional notching to the notes for non-performance risk, according to Fitch’s criteria, as they have no going-concern loss-absorption features. 

Rating sensitivities 

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