Corporates less vulnerable to possible sovereign default than financial institutions: Fitch

• Says most Fitch-rated corporates have strong biz profiles, low leverage and sound liquidity and limited exposure to govt.
• But points out financial institutions have high exposure to govt. securities, wider domestic economy and local financial markets

Fitch Ratings views most rated Sri Lankan corporates as less vulnerable than local financial institutions to the sovereign’s financial distress. “This is because most rated corporates have a combination of strong business profiles, low leverage, sound liquidity and limited exposure to government. 

On the other hand, local financial institutions’ ratings are usually constrained by the sovereign rating, due to the strong correlation with the sovereign’s credit profile, as reflected in high exposure to government securities, the wider domestic economy and local financial markets,” Fitch Ratings said.

The national ratings of most corporates are now grouped at the upper end of the Sri Lanka national rating scale, following the scale’s recalibration, which followed the downgrade of the sovereign rating to ‘CCC’, from ‘B-’, in November 2020.

“In a stressed environment that follows a sovereign default in particular, we believe stronger corporates (that are not linked to the sovereign) with sufficient on-balance sheet liquidity can weather some period of financial market stress, although accessibility to external capital may be limited (but not completely shut out) and may come at a high cost. Most Fitch-rated corporates at ‘AA(lka)’ or above benefit from strong business profiles and we therefore expect they will continue to be able to access local bank funding in a hypothetical stress scenario that follows a sovereign default,” the rating agency noted.

“Furthermore, corporates rated ‘AA+(lka)’ and ‘AAA(lka)’ have low leverage and solid liquidity, which act as buffers against a prolonged deterioration in operating cash flows in the event revenues fall. 

Some issuers benefit from a degree of support from stronger shareholders based overseas, which is not affected by challenges in the domestic economic environment,” it added.