Fitch downgrades SLT, SLIC and SriLankan Airlines ratings following sovereign action

Fitch has downgraded the ratings of Sri Lanka Telecom, Sri Lanka Insurance Corporation and SriLankan Airlines following a similar action on Sri Lanka sovereign rating.

On 29 February Fitchdowngraded Sri Lanka’s Long-Term Foreign- and LocalCurrencyIDRs to ‘B+’ from ‘BB-’ and assignment of a Negative Outlook.

As a consequence, it said Sri Lanka Telecom PLC’s (SLT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) has been downgraded to ‘B+ from ‘BB-’. The Outlook on the IDRs is Negative. The agency has affirmed SLT’s National Long-Term Rating at ‘AAA(lka)’ with a Stable Outlook.

Fitch said SLT’s IDRs are constrained by Sri Lanka’s IDRs as the Government directly and indirectly holds amajority stake in SLT and exercise significant influence on its operating and financial profile.

Also, SLT’s second-biggest shareholder, Malaysia’s Usaha Tegas– whichowns 44.9% of SLT – doesnot have any special provisions in its shareholder agreement to dilute the government’ssignificant influence over SLT.

Fitch Ratings has downgraded the Insurer Financial Strength (IFS) rating of Sri Lanka Insurance Corporation (SLIC) to ‘B+’ from ‘BB-’. The Outlook is Negative. 

In selected cases, Fitch would allow insurers with very strong credit profiles, coupled with sizeable international business diversification, to exceed the sovereign rating. However, SLIC business is concentrated in Sri Lanka and as a result, its rating is constrained by the rating of the sovereign.

Fitch said SLIC’s ratings reflect its well-established franchise and market position in Sri Lanka, 99.9% state ownership, and its importance to the government as the largest state-owned insurer.

Fitch has also downgraded the rating on SriLankan Airlines Ltd.’s (SLA) US dollar-denominated government-guaranteed bonds to ‘B+’ from ‘BB-’.

The national carrier’s bonds are rated at the same level as SLA’s parent, the State of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the State.

Fitch said the Sri Lankan sovereign 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.

Government has identified tourism as a key economic growth driver in the medium term, andState support for SLA reflects its strategic importance as the leading airline to drive growth inthe tourism sector. Tourist arrivals to Sri Lanka rose to 1.8 million in 2015 from 1.0 million in2012.

The State held 99.5% of SLA through direct and indirect holdings at end-2015.