Fitch Ratings has downgraded Ceylon Dollar Bond Fund’s Fund Credit Quality Rating to ‘B+’ from ‘BB-’ and affirmed the Fund Volatility Rating at ‘V5′.
The rating action follows Fitch’s downgrade of Sri Lanka’s Issuer Default Ratings (IDR) to ‘B+’ from ‘BB-’; and assignment of a Negative Outlook on the IDR. The ratings on several Sri Lanka banks were also downgraded following the sovereign rating downgrade. (see “Fitch Downgrades Sri Lanka to ‘B+’; Outlook Negative” dated 29 February 2016 and “Fitch Takes Rating Actions on Sri Lanka Financial Institutions on Sovereign Downgrade” dated 2 March 2016 at www.fitchratings.com).
KEY RATING DRIVERS
The fund is rated based on a target portfolio, which comprises of four US dollar bonds that are issued by the government of Sri Lanka and three licensed banks in Sri Lanka – all of which are now rated ‘B+’.
As of 2 March 2016, the fund had invested in three of the four issuances in the target portfolio (representing 73% of the portfolio). The rest of the funds are placed in US dollar deposits with Deutsche Bank Sri Lanka, a branch of Deutsche Bank AG (A-/Stable/F1). The fund will invest up to 3% of its assets in US-dollar fixed deposits in a licensed commercial bank in Sri Lanka.
A further downgrade of the ratings on the Sri Lankan sovereign or the banks in which the fund has invested its assets, especially the banks whose issues are not government guaranteed, could lead to a downgrade of the Fund Credit Quality Rating.