Fitch Ratings has assigned Commercial Bank of Ceylon PLC's (COMB, AA-(lka)/Rating Watch Negative) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR10 billion an expected National Long-Term Rating of 'A(EXP)(lka)', on Rating Watch Negative (RWN).
The debentures, which have maturities of five, seven and 10 years, will be listed on the Colombo Stock Exchange. The bank plans to use the proceeds to further strengthen its Tier 2 capital base, raise long-term funding and bridge maturity mismatches.
The bank expects the debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The notes include a non-viability clause whereby they will convert to ordinary voting shares subject to the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka.
The final rating is subject to the receipt of final documentation conforming to information already received.
KEY RATING DRIVERS
Fitch rates the proposed Basel III Tier 2 notes two notches below the bank's National Long-Term Rating of 'AA-(lka)', on RWN. This reflects Fitch's baseline notching for loss severity for this type of debt, and our expectations of poor recoveries.
There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.
COMB's National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank's standalone financial strength and best indicates the risk of the bank becoming non-viable.
The RWN on the subordinated debt stems from the RWN on the corresponding National Long-Term Rating. Fitch maintained the RWN on COMB's National Long-Term Rating on 11 July 2022, reflecting potential for the bank's creditworthiness relative to other entities on the Sri Lankan national ratings scale to deteriorate, given the heightened stress on funding and liquidity, and its significant exposure to the sovereign via investment in foreign-currency instruments that raises risks to its overall credit profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the bank's National Long-Term Rating will lead to a downgrade of the subordinated debt ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the bank's National Long-Term Rating will lead to an upgrade of the subordinated debt ratings. However, there is limited scope for upward rating action given the RWN.
