Fitch Ratings assigns 'BB+ (sri)' rating to Union Bank

FRL assigns 'BB+ (sri)' national rating to the Implied Long-term unsecured Senior Debt of Union Bank of Colombo ("UB").

'BB+ (sri)' rating indicates that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.

The rating reflects the restructuring measures implemented at UB since mid 2003, including an equity infusion by a consortium of investors led by Sampath Bank (rated 'A+(sri)' by FRL), the appointment of a new CEO and strengthening of senior management.

Along with the equity infusion, UB disposed a substantial portion of its bad loans to a special purpose vehicle in consideration for a long-term bond enabling the bank to report significantly better asset quality indicators. UB's gross NPL ratio as at Dec. 2005 was 4% vis-...-vis a ratio of around 38% in December 2002.

UB's internal processes and controls, particularly credit appraisal, monitoring and recoveries have been strengthened. Going forward, FRL expects UB to contain NPL accretion below industry averages on account of these improvements.

Further, if this bond is discounted to reflect estimated market value, UB's net worth position would be negative. UB's management advises that the bank intends to raise new capital during 2006 to address its low capitalisation position.

Subsequent to its restructuring in 2003, new investors, as a consortium hold 70.6% of the bank's equity as at Jan. 2006, and enjoy preferred rights over the ordinary shareholders.