Fitch rates Senkadagala Finance’s senior debt final ‘BBB+’

Fitch Ratings has assigned Senkadagala Finance PLC’s (SFC, BBB+ (lka)/Stable) issue of senior unsecured redeemable listed debentures of up to Rs.1 billion a final National Long-term Rating of ‘BBB+(lka)’.

The assignment of the final rating follows the receipt of final documents which conform to information previously received. The final rating is at the same level as the expected rating assigned on 18 April 2013.

Rating action rationale

The debentures are rated at the same level as SFC’s National Long-term Rating as they constitute direct, unconditional, unsecured and unsubordinated obligations of the bank.

The debentures are to be issued in two tranches with a maturity of three and four years, with fixed- and floating-rate coupon payments. The notes do not contain any deferral clauses and therefore Fitch has not assigned any ‘equity-credit’ to this issue. SFC expects to use the proceeds to fund balance sheet growth and to help reduce maturity mismatches between its assets and liabilities.

Key rating drivers

SFC’s rating reflects its long operating history and sound credit profile through economic cycles, supported by credit controls, low refinancing risk and high profitability compared with domestic peers.

SFC’s credit profile is constrained by its elevated financial risk, as reflected in lower capitalisation - measured by its tier-1 capital adequacy ratio (CAR) and equity/assets ratio - during the financial year ended March 2012. Tier-1 CAR (after including retained profits) improved to an estimated 14.4% during 9MFY13 (FY12: 11.5%) as the rate of internal capital generation kept pace with asset growth.

SFC relies to a large extent on secured borrowings to fund its lending activities, which has helped the company to reduce refinancing risk. However, over-reliance on secured borrowings can limit SFC’s future financing flexibility to the extent of unencumbered assets on its balance sheet, and may also reduce recovery prospects of its unsecured creditors in the event of liquidation. SFC’s ratio of unencumbered assets/unsecured liabilities was 1.2x at end-9MFY13, which is low compared with that of domestic peers.

Rating sensitivities

A continued weakening in SFC’s capitalisation, measured by its tier 1 CAR and equity/assets ratio, or financial flexibility, as indicated by a further reduction of unencumbered assets relative to unsecured liabilities, could lead to a downgrade.

An upgrade of SFC’s rating is contingent upon the company strengthening its franchise and improving its capitalisation to levels commensurate with higher-rated peers, while maintaining satisfactory asset quality and profitability.