DFCC goes for Rs. 3.5 b debenture; gets AA rating for senior debt

Fitch Ratings has assigned DFCC Bank’s (DFCC; ‘AA(lka)’/Stable) proposed issue of senior unsecured redeemable debentures of up to Rs. 3.5bn a National Long-Term ‘AA(lka)’ rating.

The proposed debentures are rated at the same level as DFCC’s National Long-Term rating as they constitute direct, unconditional, unsecured and unsubordinated obligations of the bank.

The proposed debentures will have a maturity of up to five years, with bullet principal repayment on maturity while coupon payments will be at fixed and floating rates. The notes do not contain any deferral clauses.

DFCC expects to use the proceeds to fund long-term lending, to strengthen liquidity and to improve the maturity profile of its liabilities.

The ratings reflect DFCC’s strong capitalisation relative to its risk profile. Consolidated Tier 1 capital adequacy ratios (CAR) of 19.19% at end-September 2012 and 21% at end-March 2012 (FYE12) were significantly higher than that of rated peers, reinforced by the bank’s profitability and capital retention.

The ratings also factor in DFCC’s high, albeit declining, exposure to medium- to long-term project finance (70% and 44% of bank and group advances, respectively, at FYE12), which is vulnerable to economic downturns and dependent on long-term funding.

However, project finance as a share of total loans has been decreasing due to growth at DFCC’s subsidiary – DFCC Vardhana Bank PLC (DVB; ‘AA-(lka)’/Stable). DVB is a licensed commercial bank, whose contribution to consolidated advances was 37% at FYE12 (FYE11: 31%) and is likely to increase further.

A rating downgrade could result from sustained weakening in capitalisation due to rapid credit growth or marked deterioration in asset quality. The ratings may also come under pressure from a shift in the group’s risk profile as DVB grows to account for a larger share of group assets. Upside rating potential is limited by the aforementioned risks inherent in its business model, and by its currently high rating level on the National scale.