Fitch Affirms Bank of Ceylon Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook

01st April 2013, www.ft.lk

Fitch Ratings has affirmed Bank of Ceylon (BOC)’s Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook.

It has also affirmed BOC’s Viability Rating at ‘b+’ and its National LT rating at ‘AA+(lka)’ with a Stable Outlook. BOC’s Support rating and Support Rating Floor have also been affirmed at ‘3’ and ‘BB-’ respectively, the latter at the same level as the sovereign.

Fitch has also assigned BOC’s proposed senior unsecured USD-denominated notes an expected rating of ‘BB-(EXP)’, same as its FC IDR given that the notes are expected to rank equally with the bank’s senior unsecured creditors. The proposed notes will have a maturity of five years, while semi-annual coupon payments will be at a fixed rate. The final rating is contingent upon receipt of final documents conforming to information already received.

BOC’s LT IDRs are driven by the Government of Sri Lanka’s high propensity and limited ability to provide support to the bank under extraordinary situations. In Fitch’s view, the State’s high propensity stems from BOC’s systemic importance as the largest bank in the country (accounting for nearly 20% of banking system deposits and assets), its quasi-sovereign status, its role as a key lender to the Government and full Government ownership, while the State’s limited ability is reflected in the ‘BB-’/Stable Sovereign rating.
BOC’s VR – which is one notch lower than the LT IDR – reflects the growing pressures particularly in terms of its weakening capitalisation and deteriorating asset quality, which may experience further deterioration in the near term. While BOC’s strong domestic franchise remains a strength from a funding perspective, near-term funding challenges will likely remain, considering the high loans-to-deposits ratio (LDR) amid rising interest rates.

BOC’s loan book has a high exposure to the State and State-Owned Entities (SOE) and while a sizeable portion of the exposure is State guaranteed, the resulting concentration risk is significant.
For example, Ceylon Petroleum Corporation itself accounts for nearly 20% of BOC’s total exposure. Notwithstanding State exposures, BOC’s gross non-performing loan ratio weakened to 2.8% (FY11: 2.1%) in FY12 owing to one-off event risks such as floods and drought (in Q412) and the Maldives’ political turmoil.

BOC’s capitalisation (Tier 1 Capital Adequacy Ratio, 2012:9%, 2011:9.3%) – which is already impacted by high dividend pay-outs (FY12: 38.4%, FY11: 34%) – has been steadily weakening. High loan growth, deteriorating net NPL-equity (FY12: 15%) and the absence of fresh capital injection since 2007 remain the key reasons.
While slowing loan growth and higher SOE exposure (zero risk weight for State guarantee) may help BOC to negotiate the difficulty in the interim, timely capital injections from the State remain critical to BOC’s future capitalisation.

The dip in BOC’s low-cost deposits ratio (FY12: 44%, FY11: 51%) was broadly in line with the industry trend. Given the intense competition for deposits and high credit demand from the State, Fitch believes that BOC’s endeavour to reduce its LDR to around 90% may not be possible in the near term.
Any change in Sri Lanka’s Sovereign rating or the perception of State support to BOC could result in a change in BOC’s IDRs and National Ratings. Visible demonstration of preferential support for BOC will be instrumental to an upgrade of its National LT Rating.

The VR remains under pressure and could be downgraded if a sharp asset-quality downturn is not complemented by timely recapitalisation from the State. An upgrade to VR, though unlikely in the near-term, will be triggered by consistent improvement in both asset quality parameters and capital levels and supported by BOC’s ability to lower loan-deposits ratio overtime.
BOC is the largest bank in terms of assets in Sri Lanka and has a wide domestic presence across Sri Lanka. BOC has 13 subsidiaries and five associates and has branches in Chennai, India and Male (Maldives); and a fully-owned subsidiary, Bank of Ceylon (UK) Ltd, in the UK.

FT Quick Take -  A full list of BOC’s ratings:

Long-term Foreign- and Local-Currency IDRs: affirmed at ‘BB-’; Outlook Stable
Viability Rating: affirmed at ‘b+’
Support Rating: affirmed at ‘3’
Support Rating Floor: affirmed at ‘BB-’
USD senior unsecured notes: affirmed at ‘BB-’
Proposed USD senior unsecured notes: assigned at ‘BB-(exp)’
National Long-Term rating: affirmed at ‘AA+(lka)’ ; Outlook Stable
Outstanding subordinated debentures: affirmed at ‘AA(lka)’.

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Fitch & Standard & Poor’s Warn Sri Lanka on Its Weak External Position and the Risk to Sovereign Credit Rating

01st March 2012, www.ft.lk

Fitch and Standard & Poor’s rating agencies yesterday warned Sri Lanka that its sovereign credit rating was at risk due to the country’s weak external position and the depletion of its foreign currency reserves to protect the rupee exchange rate.

The country’s Central Bank, which is under a $ 2.6 billion International Monetary Fund (IMF) loan programme, for months last year disregarded the global lender’s warning that the policy of defending the rupee was unsustainable.


The monetary authority blew through more than $ 2.7 billion in the second half of last year staving off depreciation pressure, cutting its forex reserves by a third. At the same time, rising oil prices produced a record trade gap.

Fitch in a special report said the sharp drop in reserves in the second half of 2011 has increased the risks on the sustainability of the country’s balance-of-payments.

Going a step further, S&P revised down the country’s sovereign rating outlook to stable from positive due to the external imbalances stemming from a decline in the reserves. “We revised our outlook on the long-term foreign currency rating to reflect the country’s deteriorating external liquidity,” S&P Credit Analyst Takahira Ogawa said.

S&P said it may lower the rating if there is “substantial further deterioration” of external liquidity or if Sri Lanka’s growth and revenue prospects fall below expectations.
“Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance-of-payments on a more sustainable footing,” Fitch Sovereign Team Director Philip McNicholas said in a statement.

Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight, and thus adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings, Fitch said.

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Fitch and Moody's Upgrade Sri Lanka's Sovereign Rating due to Key Factors

24th July 2011, www.sundayobserver.lk

Fitch Ratings has upgraded Sri Lanka's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB-' from 'B+'. The outlooks on these ratings are 'Stable'.

Further, Fitch has upgraded the Country Ceiling to 'BB-' from 'B+' and affirmed the Short-Term Foreign-Currency IDR at 'B'.

Meanwhile, Moody's Investors Service has upgraded outlook of Sri Lanka's B1 foreign currency sovereign rating from 'Stable' to 'Positive' due to the key factors - increasingly evident peace dividend reflected in greater macroeconomic and financial stability; policy orientation of fiscal reform and economic growth, supported by a successful IMF program; improving external payments position; and reduction in political event risk following the end of terrorism in 2009.

Fitch's decision to upgrade the ratings was based on the stabilis ation and recovery of the economy and increased efforts by the Government to bring down the budget deficit.

Moody's has said that augmented investor confidence and the increase in investments along with the falling inflation, the economy is expected to expand sustainably by 8-9 percent in the medium term.

The Central Bank has welcomed the upgrade and is confident that the measures taken towards macroeconomic stability and economic improvement would yield further favourable results.

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Sri Lanka Raises $ 1bn 10yr Sovereign Bond Riding on the Country’s Recovery Story and Positive Reviews by Rating Agencies

22nd July 2011, www.financeasia.com, By Denise Wee

Markets have hardly been conducive to new debt issues recently, but Sri Lanka took advantage of a brief calm early yesterday morning to successfully price a $1 billion 10-year global bond.

Sri Lanka is used to dealing with bigger problems than volatile financial markets, and the once war-torn country’s ability to raise such a large amount of money at a competitive yield is testament to just how far it has come since the civil war ended in 2009 — and contrasts sharply with the experience of its embattled European peers.

Bank of America, Merrill Lynch, Barclays Capital, HSBC and Royal Bank of Scotland were joint bookrunners for the deal. Bank of Ceylon acted as a co-manager.

The leads kicked off roadshows on July 11 and decided to push ahead with pricing slightly ahead of schedule as they saw a window to launch a transaction amid relatively stable markets. They released initial guidance in the area of 6.5% on Wednesday morning ahead of officials wrapping up one-on-one meetings with investors in London later that day.

During midday London time, the leads revised guidance to 6.25% to 6.375%. Momentum for the transaction continued to build and the order book reached more than $5 billion before the US opened. The bonds eventually priced at the tight end of that final guidance, offering a spread of 332.2bp over US Treasuries.

While it was on the road, Sri Lanka also received a vote of confidence from the rating agencies. Fitch upgraded its rating on Sri Lanka to BB- from B+ on July 18, citing the country’s stabilisation and economic recovery under the IMF programme, as well as its efforts to address its budget deficit. Moody’s and S&P both revised their outlooks on Sri Lanka to positive but kept their ratings at B1 and B+ respectively.

“Sri Lanka has come a long way,” said one person familiar with the deal. “We are getting bad news out of Europe on an almost daily basis, so we were pleasantly surprised when the deal was done at a coupon of 6.25%,” he added.

The deal appealed to the US emerging market and global funds, which saw rarity value in the deal. Sri Lanka tapped the market just 10 months ago, but has fewer outstanding bonds than Indonesia and the Philippines.

The final book stood at $7.5 billion, with orders from 315 accounts. US investors were allocated 43%, Europe was allocated 30% and Asia 27%. Fund managers were allocated the biggest share with 86%, banks/private banks were allocated 8%, corporates 3% and insurers 3%.

The rush of fund flows from the US into emerging market sovereigns — which started in 2009 and accelerated last year — has tapered off slightly this year as investors have turned defensive. However, Sri Lanka has shown that there is still ample demand in the US for the right credit.

Malaysia’s $2 billion sukuk global bond, in contrast, attracted a more muted response from US investors, who were allocated just 4% of the five-year tranche and 15% of the 10-year tranche.

Sri Lanka’s bonds traded at 101.5 in the secondary market yesterday morning, rising 1.5 points from the par issue price.

The deal is Sri Lanka’s second 10-year issue. The sovereign priced its debut $1 billion 10-year global bond in September last year via arrangers Bank of America Merrill Lynch, HSBC and Royal Bank of Scotland. That deal paid a similar coupon of 6.25% but offered a higher spread of 373.1bp over Treasuries. As a spread over Treasuries, Sri Lanka paid roughly 40bp less in its latest deal.

According to one person familiar with the deal, the Sri Lanka bonds maturing October 2020 were trading at a yield of 6.1% while the new bonds were being marketed. Taking into account the US Treasury yield curve, the nine-month extension was worth about 14bp. This put the theoretical value of the new 10-year bond maturing July 21, 2021 at about 6.24%, which meant that the new bonds came with hardly any new issue premium. Following the pricing of the deal, the existing Sri Lanka October 2020s rallied and were quoted at 102.5 and a yield of 5.9%.
Related Info :

• Sri Lanka's $1bn Bond to be Managed by HSBC, Bank of America & Royal Bank of Scotland

• Sri Lanka's $ 1bn 10yr Sovereign Bond May Yield 6.5pct and Expected to be Comfortably Oversubscribed

• Moody's Gives Sri Lanka B1 Sovereign Rating with a Stable Outlook

• Fitch Affirms Sri Lanka's LTIDR B+. Revised Outlook to Positive from Stable

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Sri Lanka GDP Growth 7.2pct in 2010 - Fitch Forecast

08th October 2010, www.dailynews.lk

Fitch Ratings forecasts Sri Lanka's GDP growth to average 7.2 percent during the 2010 - 2012 period compared to an average of 5.1 percent recorded during the last 20 years.

The rating agency recently uplifted the country's creditworthiness which reflect the economic benefits of post war transformation and IMF support, news360.lk reported. Fitch says the IMF program in the country has lifted investor's confidence on Sri Lanka thus helping to pick up private capital inflows to the country and in turn a rise in foreign exchange reserves.

Fitch in its rating report adds that Sri Lanka has made headway in integrating the war torn Northern and Eastern provinces into the rest of the economy which it notes will help boost the nations productive capacity.

The Agency also predicts that the end of the war will help Sri Lanka cut defence spending which accounted for over 15 percent of the Government spending.

It says the Island's authorities' ability to boost tax revenues while consolidating the budget deficit and significantly lowering the level of overall Public debt would be a positive development for the country's credit ratings.

Further adding, Fitch notes that the ability to attract foreign direct investment will help Sri Lanka to offset its loss of EU GSP plus status. www.priu.gov.lk