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Wednesday July 24th, 2024

Fitch downgrades Sri Lanka DDR bonds to ‘Default’, rupee rating to ‘RD’

ECONOMYNEXT – Fitch Ratings said it has downgraded the rating on several bonds involved in a domestic debt restructuring to default, while the long-term local currency rating was downgraded to ‘Restricted Default’.

“The ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’ while its other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’,” the rating agency said.

Fitch downgraded Sri Lanka’s foreign currency rating to restricted default when the country defaulted on its sovereign and bilateral creditors last year.

The full statement is reproduced below:

Fitch Downgrades Sri Lanka’s Long-Term Local-Currency IDR to ‘RD’

Thu 14 Sep, 2023 – 2:08 PM ET

Fitch Ratings – Hong Kong – 14 Sep 2023: Fitch Ratings has downgraded Sri Lanka’s Long-Term Local-Currency (LTLFC) Issuer Default Rating (IDR) to ‘RD’ (Restricted Default) from ‘C’.

The ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’ while its other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’.

The Long-Term Foreign-Currency (LTFC) IDR has been affirmed at ‘RD’, and the ratings on Sri Lanka’s foreign-currency bonds have been affirmed at ‘D’.

All issue ratings have subsequently been withdrawn.

Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

A full list of rating actions is detailed below.

Fitch has withdrawn the issue ratings of Sri Lanka’s foreign and local-currency bonds as these are no longer considered to be relevant to the agency’s coverage.
KEY RATING DRIVERS

Distressed Debt Exchange: The downgrade of Sri Lanka’s LTLC IDR reflects the partial completion of an exchange of Sri Lanka’s T-bonds on 14 September as part of a broader domestic debt optimisation (DDO) launched in July 2023. The DDO also includes conversion of T-bills held by the Central Bank of Sri Lanka (CBSL) into treasury bonds (T-bonds), which has not yet been completed.

In Fitch’s view, the exchange of T-bonds constitutes a distressed debt exchange (DDE) under the agency’s criteria, given that the maturity extension of the tendered bonds represents a material reduction in terms versus the original contractual terms, and given that the exchange is needed to avoid a traditional payment default.

Reduction in Terms: Eligible bonds for which tenders were received and accepted have been exchanged into 12 new instruments of equal size and the same aggregate principal amount, maturing between 2027 and 2038. Accepted tenders reached about 37% of the outstanding principal amount of eligible bonds outstanding as of 28 June 2023. Accepted tenders were predominantly by superannuation funds, which will face higher tax rates on income from T-bonds if they did not meet a participation threshold.

Local-Currency Debt Service Continuing: Fitch believes that Sri Lanka has continued to service the T-bonds throughout the DDO process, and that T-bonds not tendered in the exchange will continue to be serviced as per their original terms, including but not limited to the entirety of the 12 series of T-bonds (out of 61 eligible series) for which no valid tenders were received. Four of these 12 series were rated by Fitch and were affirmed at ‘C’ prior to withdrawal.

Local-Currency Restructuring Incomplete: Under Fitch’s rating criteria, the LTLC IDR will remain in ‘RD’ until the debt exchange is completed in its entirety. Fitch deems the process incomplete, as the exchange of T-bills held by CBSL is still pending. Fitch regards the T-bills as public debt securities, and they are also held by private investors.

Foreign-Currency IDR in Default: The sovereign remains in default on foreign-currency obligations and has initiated a debt restructuring with official and private external creditors. The Ministry of Finance had issued a statement on 12 April 2022 that it had suspended normal debt servicing of several categories of external debt, including bonds issued in international capital markets, foreign currency-denominated loans and credit facilities with commercial banks and institutional lenders.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Sri Lanka has a medium WBGI ranking in the 45th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

ESG – Creditor Rights: Sri Lanka has an ESG Relevance Score of ‘5’ for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The affirmation of Sri Lanka’s LTFC IDR at ‘RD’ and downgrade of LTLC IDR to ‘RD’ reflect a default event.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

– The Long-Term IDRs are at the lowest level, and cannot be downgraded further

– The Short-Term Local-Currency IDR will be downgraded to ‘RD’ on the completion of the exchange of T-bills

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

– Following completion of the debt exchange with CBSL, Fitch will assign Sri Lanka’s LTLC IDR based on a forward-looking assessment of its willingness and capacity to honour its local-currency debt

– For the LTFC IDR, completion of the foreign-currency commercial debt restructuring that Fitch judges to have normalised relationship with private-sector creditors may result in an upgrade

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

In accordance with the rating criteria for ratings in the ‘CCC’ range and below, Fitch’s sovereign rating committee has not used the SRM and QO to explain the ratings, which are instead guided by the agency’s rating definitions.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LTFC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the LTFC IDR, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

COUNTRY CEILING

The Country Ceiling for Sri Lanka is ‘B-‘. For sovereigns rated ‘CCC+’ or below, Fitch assumes a starting point of ‘CCC+’ for determining the Country Ceiling. Fitch’s Country Ceiling Model produced a starting point uplift of zero notches. Fitch’s rating committee applied a +1 notch qualitative adjustment to this, under the balance of payments restrictions pillar, reflecting that the private sector has not been prevented or significantly impeded from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch does not assign Country Ceilings below ‘CCC+’, and only assigns a Country Ceiling of ‘CCC+’ in the event that transfer and convertibility risk has materialised and is affecting the vast majority of economic sectors and asset classes.

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Fitch confirms ‘A-(lka)’ domestic rating of Seylan Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term ‘A-(lka)’rating on Sri Lanka’s Seylan Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

Fitch said it expected a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.

“We expect a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.”

The full statement is reproduced below:

Fitch Affirms Seylan Bank at ‘A-(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Seylan Bank PLC’s (Seylan) National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable. Fitch also affirmed Seylan’s Sri Lankan rupee-denominated outstanding subordinated debt at ‘BBB(lka)’.

KEY RATING DRIVERS

Intrinsic Profile Drives Rating: Seylan’s National Long-Term Rating reflects its own financial strength, which is influenced by the bank’s exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Seylan’s credit profile. The rating also reflects Seylan’s modest domestic franchise as Sri Lanka’s seventh-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the banks’ OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economy Supports Lending: We anticipate the improvements in macroeconomic conditions to support Seylan’s capacity to generate and maintain business volumes.

However, the bank’s business profile continues to be affected by the weak domestic operating environment. We expect a modest increase in Seylan’s proportion of net loans to total assets (60.0% at end-1Q24) in the near- to medium-term, as lending resumes, comparable with its peers.

Sovereign Risk Remains: Seylan’s risk profile assessment continues to be affected by its exposure to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds represented 1.7% of its assets at end-2023, with impairments of 52% held against them. Furthermore, local-currency-denominated treasury securities accounted for 21% of assets, comprising 56% in treasury bonds and 44% in treasury bills at end2023. This makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans to Decline: We expect Seylan’s impaired (stage 3) loans ratio to decline gradually over the medium term – given the bank’s recovery efforts, improvements in borrowers’ repayment capacity due to economic stabilisation, and moderate loan-book growth. This is reflected in the modest improvement in the ratio to 13.8% in 1Q24 from 14.3% at end-2023 (end-2022:12.6%). That said, the impaired-loans ratio remains higher than the industry average of 12.8% (end-2023: 12.8%).

Reduced Risks to Profitability: We believe that downside risk to profitability from the restructuring of sovereign bonds has declined, and any additional impairment, if necessary, will be manageable due to the existing provisions on the holdings. We expect Seylan’s operating profit/risk-weighted assets (end-1Q24: 4.7%, 4-year average 2.1%) to moderate over the medium term, due to the decline in interest rates and the increased risk density from the rising share of loans in assets. However, we expect these to be partially offset by lower credit costs.

Manageable Risks to Capital: We believe that the downside risk to capital from the bank’s exposure to defaulted sovereign bonds is manageable, considering the announced restructuring terms, given that the bank held provisions covering 52% of this exposure at end-2023. Its regulatory common equity tier 1 (CET1) capital ratio was 13.0% at end1Q24 (excluding 1Q24 profit), below the industry average of 14.2%.

Funding and Liquidity Risks Ease: Seylan’s funding and liquidity stress has eased on both the foreign and local-currency fronts relative to the crisis period, due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its higher liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, Seylan’s funding and liquidity profile, particularly in foreign currency, remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in the bank’s creditworthiness relative to other Sri Lankan issuers.

A deterioration in Seylan’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased downward pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade in the rating. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT

Seylan’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. 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.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com (Colombo/Jul24/2024)

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Fitch confirms ‘A(lka)’ domestic rating of Sampath Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term A(lka) rating on Sri Lanka’s Sampath Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

The bank had stage 3 loans of nearly 17 percent at end-1Q24 (2023: 16.6 percent).

Fitch expected this ratio to decrease in the near- to medium-term alongside focused recoveries.

“We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth.”

The bank also had defaulted sovereign bonds. “Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24.”

The full statement is reproduced below:

Fitch Affirms Sampath Bank at ‘A(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Sampath Bank PLC’s (Sampath) National Long-Term Rating at ‘A(lka)’. The Outlook is Stable. Fitch also affirmed Sampath’s outstanding Sri Lankan rupee-denominated subordinated debt at ‘BBB+(lka)’.

KEY RATING DRIVERS

Intrinsic Profile Drives Rating: Sampath’s National Long-Term Rating reflects its own financial strength, which is highly influenced by its exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Sampath’s credit profile. The rating also reflects Sampath’s modest domestic franchise as Sri Lanka’s fifth-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the bank’s OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economic Stabilisation Aids Business Profile: We believe the gradual improvement in economic conditions should support Sampath’s ability to generate and defend business volumes, despite the vulnerabilities from the weak sovereign and economy. We expect a moderate resumption in lending alongside the gradual economic recovery, similar to peers. This should result in a higher loan book share of assets (net loans to assets of 48.0% at end-1Q24) in the medium term.

Sovereign Risk Remains: Sampath’s risk profile assessment continues to reflect its exposures to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24. In addition, local-currency-denominated treasury securities contributed to 34% of its assets at end-2023, of which 59% were treasury bonds and the remainder in treasury bills, which makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans Decline Gradually: We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth. Prolonged economic challenges that continued for most of 2023 led to a further impaired-loans accretion, which together with loan book contraction resulted in the bank’s impaired-loans ratio rising to 16.6% by end-2023 (end-2022: 11.6%), above the industry’s 12.8%.

Declining Risks to Profitability: We believe downside risk to profitability from the restructuring of sovereign bonds has diminished, and any incremental impairment, if necessary, will be manageable, given the existing provisions on the holdings. We expect Sampath’s operating profit/risk weighted assets ratio (1Q24: 4.8%, 4-year average 3.2%) to moderate over the medium term on account of the decline in interest rates. This will be partially offset by lower credit costs, alongside the increase in risk density from the growth in the share of loans.

Downside Risks to Capital Manageable: We believe downside risk to capital from the bank’s exposure to defaulted sovereign bonds (1.9% as of end-1Q24) is manageable, as per the announced restructuring terms – given the bank’s provisions on these instruments amounting to 52% on the exposure at end-1Q24. The regulatory common equity tier 1 (CET1) capital ratio declined marginally to 15.6% by end-1Q24 (excluding 1Q24 profit) from 16.7% at end-2023, following a cash dividend payment, but remains one of the highest among Fitch-rated large Sri Lankan banks.

Funding and Liquidity Risks Remain: We believe Sampath ‘s funding and liquidity stress has eased on both the foreign- and local-currency fronts relative to the crisis period.

This was due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its high liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, its funding and liquidity profile – particularly in foreign currency – remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in its creditworthiness relative to other Sri Lankan issuers.

A deterioration in Sampath’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS SUBORDINATED DEBT

Sampath’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. 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.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com (Colombo/Jul24/2024)

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Sri Lanka presidential candidate cash deposits not updated in 43 years: MP

MP Dullas Alahapperuma

ECONOMYNEXT — The cash deposits Sri Lanka’s presidential candidates are required to pay have not been revised in 43 years, opposition MP Dullas Alahapperuma said, calling for a significant increase in order to save money and to prevent proxy candidates.

Alahapperuma told parliament on Wednesday July 24 that, as per the Presidential Elections Act No. 15 of 1981, a candidate nominated by a recognised political party has to deposit only 50,000 rupees while an independent candidate, or a candidate nominated by any other party or by an elector, must pay only 75,000 rupees.

The MP said the cabinet of former president Gotabaya Rajapaksa had approved an amendment to the act to increase these amounts.

“The election commission proposed that this be increased to 2.5 million rupees for political parties and 3 million for independent candidates. This was a pertinent proposal. There were 35 candidates who contested the last election,” he said.

The Act notes that “Where the number of votes polled by any candidate does not exceed one-eighth of the total number of votes polled at the election, the deposit made in respect of such candidate shall be declared forfeit and shall be transferred by the Commissioner from the deposit account to the Consolidated Fund, and in every other case the deposit shall be returned to the person who made the deposit, as soon as may be after the result of the election is declared.”

At the 2019 presidential election, said Alahapperuma, the deposits made by all candidates besides the top two contenders were transferred to the Consolidated fund.

“The number of candidates might be 80 or 85 this election. Many candidates have no basis for contesting, and it costs a vast sum of money to print ballots and other expenses, not to mention the time consumed for counting votes. This is not just to prevent proxy parties from contesting but also to save a lot of national wealth,” he said.

Leader of the House Susil Premajayantha responding to Alahapperuma said, however, that it would not be possible to pass the proposed amendment in time for the 2024 presidential election.

“The election commission made this proposal some time ago. But we know that to gazette a bill, we need to first draft the bill, the cabinet has to decide on it, send it back to the Legal Draftsman, and receive clearance from the Attorney General. So there is no time to bring this amendment for the upcoming presidential election. You can propose it at the next one,” he said. (Colombo/Jul24/2024)

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