Fitch downgrades BOC’s Foreign Currency IDRs to RD

Fitch Ratings has downgraded Bank of Ceylon’s (BOC) Long- and Short-Term Foreign Currency (FC) Issuer Default Ratings (IDRs) to ‘RD’ (Restricted Default) from ‘CC’ and ‘C’, respectively. 

Fitch has also downgraded the Viability Rating (VR) to ‘f’ from ‘cc’, and removed the ratings from Rating Watch Negative (RWN). The rating actions are in accordance with Fitch’s rating definitions.

At the same time, Fitch has maintained BOC’s Long-Term Local-Currency (LT LC) IDR  of ‘CCC’ on RWN as well as its National Long Term Rating of ‘AA-(lka)’.

Fitch Ratings has been made aware of missed payments on BOC’s foreign-currency obligations which underpins our rating action on its LT FC IDR, ST FC IDR and VR. 

“We believe the foreign-currency funding and liquidity profile is highly stretched, and also  believe this is exacerbated by the sovereign’s debilitated credit profile (Long-Term Foreign-Currency IDR of ‘RD’ and Long-Term Local-Currency IDR of ‘CCC’),” Fitch said. 

It said BOC’s LT LC IDR takes into consideration that  the risk of local-currency restrictions being imposed is lower than that of foreign-currency restrictions, should there be any, due to the sovereign having defaulted on its foreign-currency obligations. It reflects our view of the sovereign’s current and likely continued  access to local-currency funding. The bank has so far maintained access to local-currency  liquidity, such as via the Central Bank of Sri Lanka (CBSL).

The RWN on BOC’s National-Long Term Rating reflects the RWN on its LT LC IDR and  also the potential for the bank’s creditworthiness relative to other Sri Lankan national scale ratings to deteriorate, given the potential stress on bank’s funding and liquidity, and also its significant exposure to the sovereign and broader public sector that raises its risk profile.

BOC’s ability to honour its senior, foreign currency obligations has been significantly impeded by the sovereign’s worsening credit profile which has limited the bank’s access to foreign currency funding and liquidity. “We believe that any foreign-currency liquidity flows from the state or the CBSL is unlikely to  be forthcoming, given the sovereign’s default status and precarious reserve position,” Fitch said. 

“Rupee liquidity has also tightened following the bank’s excessive lending to the State in  2021, but we expect local-currency liquidity to be much more manageable than foreign  currency, supported by BOC’s strong domestic franchise as well as its ability to access the  CBSL liquidity,” it added.