Fitch affirms SLT at ‘BB-’

Fitch Ratings has affirmed Sri Lanka Telecom PLC’s (SLT) Long-Term Foreign-Currency (FC) and Local-Currency (LC) Issuer Default Ratings (IDRs) at ‘BB-’, respectively, as well as its National Long-Term rating at ‘AAA(lka)’. The Outlook is Stable.

SLT’s IDRs are constrained by the respective sovereign IDRs of ‘BB-’. This is principally due to the Government of Sri Lanka owning, directly and indirectly, over 51% of SLT and the absence of any explicit shareholder arrangement between the Government and SLT’s 44.9% shareholder – Malaysia’s Usaha Tegas – that could potentially dilute the Government’s influence over SLT’s operations.
Any future change in the sovereign ratings will lead to a corresponding change in SLT’s ratings. SLT’s unconstrained ratings reflect its market-leading position in Sri Lankan fixed-line (aggregate of wireline and code division multiple access) and broadband sectors and its second position in the country’s mobile segment.
SLT’s ratings have high headroom due to its existing conservative credit profile, with 2011 funds flow from operations (FFO) adjusted net leverage and operating EBITDAR margins flat at 0.2x and 33%-34%, respectively, and its comfortable access to liquidity.
Fitch, however, expects SLT’s credit metrics to deteriorate in 2012-2013 due to the company’s plan to invest in fibre-to-the-node infrastructure, greater mobile capacity in the Western Province, and coverage improvements in northern Sri Lanka. Fitch expects capex as a percentage of sales to remain high at about 40% in 2012-2013, resulting in negative free cash flow and higher FFO adjusted net leverage in the medium term.
In 2011, SLT’s consolidated revenue and operating EBITDAR grew 1% yoy to Rs. 51 b and 4% yoy to Rs. 17.3 b, respectively, helped by growth in mobile and broadband segments which more than offset the declining fixed-voice, CDMA and international traffic revenue. Fitch expects this trend to continue and result in SLT’s revenue growth of only low single digits for 2012-2013.
The agency also expects operating EBITDAR margins to fall by 100bps-150bps annually for 2012- 2013 due to high competition, rising electricity and fuel expenses and subscriber retention costs.
Negative rating action on SLT’s IDRs may result if its FFO-adjusted net leverage exceeds 2.5x on a sustained basis. While a substantial weakening of the linkages between the Government and SLT, including a significant reduction in the Government’s controlling stake, could result in SLT’s LTLC IDR being rated at the same level as its unconstrained credit profile.