Fitch rates debenture issue of Seylan Bank

Fitch Ratings Lanka has assigned Seylan Bank PLC's proposed issue of subordinated debt of up to Rs. 2 billion a ‘BBB+(lka)’ National Long-Term Rating.

The proposed issue is rated one notch below Seylan's National Long-Term rating (‘A-(lka)'/Stable) to reflect higher expected losses compared with the bank's senior creditors in the event of a liquidation.

Seylan's National Long-Term Rating is driven by implied extraordinary support from the State of Sri Lanka during financial distress, given the bank's systemic importance as identified by the Central Bank of Sri Lanka. Fitch has notched Seylan's subordinated debt rating off its National Long-Term Rating as the agency expects state support to also flow through to Seylan's subordinated debenture holders in a stressed scenario.

State support has been forthcoming since Seylan's failure in December 2008, including liquidity support through Bank of Ceylon (‘BB-'/'AA+(lka)'/Stable) and two equity injections totaling Rs 7.7 billion. As at end-June 2012 the state effectively controlled 32 % of Seylan's voting equity.

The debentures will carry annual coupon payments and a bullet principal repayment at maturity, which is in five years from the issue date.

The issue size is expected to be Rs1billion, with an option to increase up to Rs2 billion in the event of an over-subscription.

The proceeds will be utilized to supplement the bank's tier 2 capital in the face of expected asset growth, and to reduce maturity mismatches between its assets and liabilities.

Fitch estimates that Seylan's total capital adequacy ratio (total CAR) will improve to 14.90 % by end-2012 if the debt issue raises Rs1 billion.

This is based on the agency's assumption that the bank will achieve 16 % annual growth in risk-weighted assets and full-retention of annualised Q112 profits of Rs1.65 billion. Total CAR stood at 14.68 % at end-March 2012.

A perceived weakening of the government's capacity to extend support to Seylan, including a downgrade of the Sovereign rating (‘BB-'/Stable), could lead to a downgrade of Seylan's ratings.

Rating upside is limited in the medium-term, given that the bank's stand-alone profile is still weaker than its support-driven rating despite considerable improvements and restructuring since 2008, and is likely to be solely driven by an upgrade of the Sovereign rating.