Fitch places MFSL on rating watch positive; rates subordinated debt final ‘BBB-’
Thursday, 27 March 2014 00:00
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Fitch Ratings Lanka has placed MCSL Financial Services Ltd.’ (MFSL) ‘BBB(lka)’ National Long-Term Rating on Rating Watch Positive (RWP) following the announcement of a proposed merger with other subsidiaries of Bank of Ceylon (‘AA+(lka)/Stable).
The merger announcement was made by Merchant Bank of Sri Lanka (MBSL) on 3 March 2014 to Colombo Stock Exchange.
The proposed subordinated redeemable debentures of up to Rs. 500 m have been assigned a final National Long-Term Rating of ‘BBB-(lka)’. The issue is expected to have a tenor of five years, with fixed-rate coupon payments.
The debentures are to be listed on the Colombo Stock Exchange. The debentures are to be included as regulatory Tier 2 capital. As the debentures do not contain any deferral clauses, Fitch has not assigned any equity credit to this issue. The assignment of the final rating follows the receipt of final documents, which conform to information previously received. The final rating is the same as the expected rating assigned on 28 November 2013.
Key rating drivers: National Long-Term Rating
The RWP reflects Fitch’s expectation of greater importance of the merged entity to the group, the likelihood of BOC being the dominant shareholder and the expectation of continued support to the merged entity by BOC.
Fitch is of the view that the differential between the rating of the merged entity and BOC would narrow, but that it would remain a subsidiary of limited importance to BOC according to its criteria ‘Rating FI Subsidiaries and Holding Companies’ due to a lack of strategic rationale to the group, negligible profit and asset contribution, and the absence of significant operational integration.
MFSL’s National Long-Term Rating is based on expectation of support from BOC in case of need. BOC currently holds 80% of MFSL-with a direct holding of 51.11% and the balance through MBSL. BOC has board representation and has also extended a credit line to MFSL.
Rating sensitivities: National Long-Term Rating
MFSL’s National Long-Term rating could be revised in the event of a change in the willingness and/or ability of BOC to support the company. This would include a change in BOC’s effective shareholding and board control.
The Rating Watch will be resolved on the completion of the merger and on the receipt of final details of BOC’s shareholding in the merged entity alongside an assessment of the importance of the merged entity to BOC and continued support to the merged entity by BOC. Fitch believes that BOC’s commitment to the merger of its financial services subsidiaries engaged in lending is high in light of the broader move towards consolidation within Sri Lanka financial sector put forward by the regulator.
Key rating drivers
Proposed subordinated redeemable debentures of up to Rs. 500 m.
MSFL’s proposed subordinated redeemable debentures are rated one notch below MFSL’s National Long-Term Rating to reflect their gone-concern loss-absorption quality in the event of a liquidation.
Rating sensitivities
Proposed subordinated redeemable debentures of up to Rs. 500 m.
The subordinated debt rating will move in tandem with MFSL’s National Long-Term Rating.
