"The issue is expected to have a tenor of between four- to five years, with fixed-rate coupon payments. PLC expects to utilize the issue proceeds to fund its balance-sheet growth. The issue will help improve the company’s liquidity position, and reduce its interest-rate risk," the ratings agency said in a statement.
The proposed debenture is rated in line with PLC’s National Long-term Rating of ‘AA-(lka)’, given that the issue is expected to rank pari passu with the company’s senior unsecured creditors.
PLC’s ratings reflect the capacity and willingness of its state-owned parent People’s Bank (PB, AA+(lka)/Stable, 75% ownership) to extend extraordinary support to PLC in times of distress. This is in turn driven by PLC’s strong association with PB’s brand and its strategic importance to PB.
PB’s capacity to support PLC is in turn derived from the financial capacity and propensity of the government of Sri Lanka (BB-/Stable), given the bank’s increasing role in Sri Lanka’s post-war economic development and its high systemic importance (18% of system assets and deposits in 2011). Fitch believes it is highly likely for government support to flow through to PLC via PB due to the reasons mentioned above as well as the potential reputation risk to the government should PLC default on its financial obligations.
The two-notch differential between the National Long-Term ratings of PLC and PB reflect potential administrative difficulties and regulatory restrictions (such as maximum single party exposures) that exist between the companies which could impede the flow of government support to PLC. Such impediments are usually observed in layered support structures.
A change to PB’s rating may result in a corresponding change to PLC’s ratings, provided that the linkage between PB and PLC remain intact. PLC’s ratings may be downgraded if PB gives up its controlling stake, or if PLC’s strategic importance to PB diminishes over time," Fitch said.