The Bank of Ceylon (BoC) has announced plans to raise up to Rs. 30 billion through a Basel III-compliant Tier 2 debenture issue, offering investors fixed and floating interest-rate options over five- and seven-year maturities.

In a disclosure to the Colombo Stock Exchange (CSE) dated October 26, the state-owned bank said its board had decided to issue listed, rated, unsecured, subordinated and redeemable debentures carrying non-viability write-down features.

The initial issue will raise Rs. 10 billion, with an option to raise a further Rs. 10 billion in the event of oversubscription. A second additional tranche of up to Rs. 10 billion may also be issued if the initial issue and the second tranche are oversubscribed, at the bank’s discretion.

The debentures will be issued at a par value of Rs. 100 each and listed on the CSE. The exchange has granted in-principle approval for the proposed issue.

Investors will be offered four categories of debentures, comprising fixed- and floating-rate instruments with maturities of five and seven years.

The five-year fixed-rate debentures will carry an annual interest rate of 12.75%, while the seven-year fixed-rate debentures will offer 13% annually. Both categories will pay interest annually.

The floating-rate five-year debentures will carry an interest rate based on the 12-month Treasury bill rate plus 1.50 percentage points, while the corresponding seven-year instruments will offer the 12-month Treasury bill rate plus 1.75 percentage points. Interest on both floating-rate categories will also be paid annually.

The issue has been rated ‘AA (Stable)’ by Lanka Rating Agency Ltd., while the bank’s issuer rating is ‘AA-(lka)/Stable’ from Fitch Ratings Lanka Ltd.

Institutional and high-value investors targeted

The issue will be open to qualified investors under the CSE Listing Rules. Eligible categories include licensed commercial and specialised banks, mutual and pension funds, the Employees’ Provident Fund and similar pooled funds, venture capital and private equity firms, licensed finance and leasing companies, insurers, companies incorporated under the Companies Act, investment trusts, investment companies and non-resident institutional investors.

Individual investors will be required to make a minimum investment of Rs. 5 million. The general minimum subscription requirement for qualified investors is Rs. 10,000, with additional applications to be made in multiples of Rs. 10,000.

Capital loss-absorption provisions

A key feature of the proposed issue is its non-viability write-down mechanism, under which debenture principal may be written down to absorb losses if the bank reaches a point of non-viability.

According to the disclosure, the write-down will be at the sole discretion of the Governing Board of the Central Bank of Sri Lanka (CBSL), without requiring approval from debenture holders.

The trigger will be the earlier of a CBSL determination that a write-down is necessary to prevent the bank from becoming non-viable, or a decision to provide public-sector capital or equivalent support without which the bank would have become non-viable.

The provisions mean that, although the debentures offer stated interest rates and defined maturities, investors will face the specific capital-loss risk associated with the non-viability mechanism, in addition to the risks inherent in unsecured, subordinated debt.

The proposed fundraising will provide BoC with Tier 2 capital instruments structured to comply with Basel III requirements. The bank has not specified in the disclosure a proposed opening date for subscriptions or a timetable for the issue.