Rating cuts on SriLankan bonds, SLT’s IDRs over sovereign downgrade

Fitch Ratings yesterday downgraded Sri Lanka Telecom PLC’s (SLT) long-term foreign- and local-currency Issuer Default Ratings (IDRs) and state-run SriLankan Airlines’ government-guaranteed bonds to ‘B+’ from ‘BB-’.

The rating action follows Fitch’s downgrade of Sri Lanka’s IDRs to ‘B+’ from ‘BB-’ and assignment of a negative outlook.

However, the rating agency affirmed SLT’s national long-term rating at ‘AAA(lka)’ with a stable outlook.

“SLT’s IDRs are constrained by Sri Lanka’s IDRs as the government directly and indirectly holds a majority stake in SLT and exercises significant influence on its operating and financial profile. Also, SLT’s second-biggest shareholder, Malaysia’s Usaha Tegas – which owns 44.9 percent of SLT – does not have any special provisions in its shareholder agreement to dilute the government’s significant influence over SLT,” Fitch said. Meanwhile, the rating agency noted that SriLankan Airlines’ bonds are rated at the same level of its parent, the state of Sri Lanka, due to the “unconditional and irrevocable guarantee provided by the state”.

The state held 99.5 percent of SriLankan through direct and indirect holdings at end-2015.
According to Fitch, Sri Lanka faces increased refinancing risks on account of high upcoming external debt maturities amid the country’s vulnerability to a shift in investor sentiment. 

“Furthermore, the sovereign’s external liquidity position remains strained, reflecting pressure on foreign-exchange reserves. The recent downgrade also reflects deteriorating public finances driven partly by consistently low general government revenues,” Fitch said.