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Tuesday May 28th, 2024

Sri Lanka banks say parate execution needed to protect depositors

ECONOMYNEXT – Sri Lanka Banks’ Association says parate execution a provision to foreclose pledged assets of borrowers who are in default is required to recover loans and repay depositors.

If the recovery procedure is taken away, will have to reduce credit to only a few borrowers to safeguard depositors.

“If Parate Rights are taken away, banks will be compelled to be extremely selective in lending and the availability of finance will be to a narrowing segment of entrepreneurs, resulting in credit to the private sector shrinking, contrary to Government and regulatory policies,” the statement said.

The statement said bank have given a number of moratoriums and usually attempts to restructure loans before recovery processes.

The full statement is reproduced below:

Parate execution is the last resort to protect depositors’ funds – SLBA

Banks exercise their legally-enshrined right to Parate Execution as a last resort, and the overarching objective is the protection of depositors’ funds that have been lent to borrowers, the Sri Lanka Banks Association (SLBA) has said in a statement to the media.

Responding to what it termed as lobbying by a group of defaulting borrowers espousing the removal or weakening of the protection of depositors’ funds, the Association said the Parate Execution remedy is aimed at recovering mortgaged assets from wilful defaulters and businesses that are no longer viable.

The SLBA, which represents all the licensed banks in the country, emphasised that banks have extended moratoriums on debt repayment for a long period exceeding 48 months in some cases, and that in instances of wilful default by borrowers, the banks owe a duty to their depositors’ whose funds are at risk, to recover the debts overdue and minimize the losses on loans granted.

The Association pointed out that the funds used to grant loans are placed with the banks by their depositors and that depositors are paid interest out of the interest charged from loans granted to borrowers. “Banks are responsible to manage this intermediary role in a very careful manner to avoid deterioration of depositor confidence which can lead to many negative economic consequences,” the SLBA statement said.

“When borrowers face difficulties in repayment, the lending banks review the causes for the inability to repay interest and/or capital, and assess how the situation needs to be remedied to restore the borrower to being able to repay loans and carry on business/economic activity,” the SLBA said.

“In such instances it is common for the banks to exercise empathy as a “partner” and assist the borrowers to come out of their challenging financial situation, and it is common for the banks to consider extension of loans, provide moratoriums, consider interest concessions and restructure the loans to suit the future cash flows of the employment or the business. Banks take this course as the preferred alternative to liquidating the assets of the borrower under loan security arrangements.

This is because it is beneficial for the customer as well as the bank to revive a business to good financial health than to shut it down and take whatever residual value is left, which in majority of cases is less than the value of the amounts due to the bank and kills the economic activity that was being financed. The banks therefore take the option of a win-win for all and support the borrowers when they face difficulties.”

“When assessing the condition of the overdue loans and their ability to be revived, banks have to accept that certain cases are beyond revival and/or that the default is wilful and in fraud of the lender. In these limited circumstances banks as responsible financial intermediaries must necessarily invoke the remedies available under the law and this includes ‘Parate Execution’ which is a measure to protect the depositors’ funds from wilful defaulters.”

The Association explained that: “As a natural consequence of investing in a business, a businessman may encounter strains principally on his ability to repay loans that cannot be sustained by bank depositor’s funds i.e. bank financing alone. A decline in the economy as in Sri Lanka due to social and political disturbances, pandemic conditions and an overwhelming public debt burden can also cause businesses to fail.

There has been governmental and external institutional aid to tide over these difficult times but the main reliance has been on the banks that have extended moratoriums on debt repayment for a long period, exceeding 48 months in some cases. The banks provide concessions and interest waivers during these difficult times to borrowers while maintaining interest payments to depositors to maintain confidence.”

“All should acknowledge the fact that the banks, guided by the Central Bank of Sri Lanka, extended their fullest support to weather a very challenging period from the Easter Sunday attacks to the pandemic, and the economic crisis that followed.”

“Parate Execution against assets securing bank debt (depositors’ funds) is the last resort. This is when all efforts at resolution of borrower’s insolvency are met with refusal to review/negotiate, usually by malicious abuse of judicial proceedings which is a common dilatory tactic.”

“It now appears that a group of defaulting borrowers in various sectors have engaged lobbyists of varying degrees of influence to espouse the removal/weakening of the protection of depositors’ funds from wilful value destruction by owners of non-viable businesses where repayment delays are deliberate.”

“Therefore, the banks wish to state the position in relation to reliefs claimed by the borrowers and the cost to the depositors who provide the funds, if recovery actions are taken away:

• Banks are always open to have one-on-one discussions with any borrower who has faced difficulties in meeting debt obligations to have alternative options for loan repayments. This is in the best interest of all stakeholders.

• If there is no source of repayment, postponing recovery action will not solve the issue and ultimately the depositors’ funds will not be returned to the banks.

• The Parate Execution remedy is aimed at recovering mortgaged assets from wilful defaulters/businesses that are no longer viable.

• The overarching objective is to protect depositors’ funds that have been lent to wilful defaulters/ borrowers.

• Depositors’ confidence is of paramount importance for economic growth which is much needed in the Sri Lankan context.

• If Parate Rights are taken away, banks will be compelled to be extremely selective in lending and the availability of finance will be to a narrowing segment of entrepreneurs, resulting in credit to the private sector shrinking, contrary to Government and regulatory policies.

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Sri Lanka reforms have started to yield positive outcomes: State minister

ECONOMYNEXT – Sri Lanka’s State Minister of Finance Shehan Semasinghe says reforms have lead to positive incomes, including an increase in reserves.

“The reforms have started to yield positive outcomes, reflecting significant progress in multiple areas. Sri Lanka’s gross official reserves have seen a significant increase, reaching USD 5.5 billion by the end of April 2024,” Semasinghe said on social media platform X (twitter).

“Additionally, the Sri Lankan rupee has appreciated by approximately 8 % against the US dollar so far in 2024. This will boosts investor confidence and enhances the country’s ability to manage external shocks and meet international obligations and enhance confidence on the economy.

“The appreciation of the rupee can help lower inflation and reduce the overall cost of living and make it easier for the government and businesses to service foreign debt, thereby improving our financial reputation globally. Further, will improve the trade balance by potentially reducing the trade deficit.”

Sri Lanka’s inflation was 1.5 percent in the 12-months to April 2024, measured by the widely watched Colombo Consumer Price Index, data from the state debt office showed.

The CCPI Index fell 0.8 percent, to 195.2 points in the month of April after falling 1.9 percent in March.

Sri Lanka’s central bank has been operating largely deflationary policy, since September 2022, except perhaps in December 2023, and also allowed the rupee to appreciate in the balance of payments surplus it created.(Colombo/May28/2024)

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Sri Lanka risks foreign retaliation over VFS visa deal

ECONOMYNEXT – The Maldives could take reciprocal action after Sri Lanka’s new system of outsourcing its visas, which requires the payment of “processing” and “convenience” charges of 26 dollars, even though the government does not collect any fees.

Maldivian authorities have reminded Sri Lanka of the long-standing bilateral agreement under which their citizens could travel freely between the two neighbours without any charges or bureaucratic barriers.

A one month stay is available without a fee.

Maldivians, who consider Sri Lanka their second home, often spend more than a month in the larger country, but are now required to pay 26 dollars to VFS Global, which has controversially been contracted to handle Sri Lankan visas.

“The Sri Lankan government will not charge a fee, but Maldivians still have to pay VFS after applying online for a visa,” a Maldivian government official said in the capital, Male. “This violates the spirit of our agreement.”

He said the new administration of President Mohamed Muizzu was taking up the issue with Sri Lankan authorities in both Male and Colombo.

In a worst-case scenario, the Maldives will be compelled to reciprocate the new cost of a Sri Lankan visa and charge Sri Lankans traveling to the archipelago. There are also expat Sri Lankans in the Maldives.

There are only a handful of countries to which Sri Lankan passport holders can travel without any visa restrictions.

Singapore is another country which could take action against Sri Lanka if the bilateral deal is found to be violated, according a source said.

Opposition parties have said in parliament that outsourcing the visa handling to VFS Global and their partners was a bigger corruption scandal than the bond scam of 2015 and 2016, when billions of rupees were stolen through insider deals. (COLOMBO/May 28, 2024)

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Sri Lanka’s WindForce Plc rated ‘BBB+(lka) with stable outlook: Fitch

ECONOMYNEXT – WindForce Plc said Fitch Ratings Lanka Ltd had assigned a ‘BBB+(lka)’ rating for the company with stable outlook.

“The rating reflects WindForce’s large exposure to Ceylon Electricity Board (CEB, BB+(1ka)/Stable) as the key offtaker. The Stable Outlook reflects Fitch Ratings’ view that risks of significant payment delays from CEB to WindForce has decreased, easing liquidity pressure,” the company said in a stock exchange filing.

The full Rating Action Commentary by Fitch Ratings Lanka Ltd:

Fitch Publishes Sri Lanka’s WindForce’s ‘BBB+(Ika)’ National Rating; Outlook Stable.

Fitch Ratings – Colombo – 22 May 2024: Fitch Ratings has published Sri Lanka-based independent power producer WindForce PLC’s ‘BBB+(Ika}’ National Long-Term Rating. The Outlook is Stable.

The rating reflects WindForce’s large exposure to Ceylon Electricity Board (CEB, BB+ (Ika)/Stable) as the key offtaker. The Stable Outlook reflects our view that risks of significant payment delays from CEB to WindForce has decreased, easing liquidity pressure. However, Fitch believes medium-term risks to weaker collections of CEB’s dues
remain, and this is subject to the consistent implementation of CEB’s cost-reflective tariff mechanism.

Key rating drivers

Improving Receivables Collection: We expect WindForce’s receivable days to remain at around 80 in next 12 months. This is based on our expectation that CEB will continue to settle its payables, following improvement in its financial profile from cost-reflective tariff revisions. WindForce’s receivable days fell to around 198 days by December 2023, from 348 days at the end of the financial year 31 March 2023 (FY23). The company says it received further payments in 1Q24 that improved its receivables materially.

Weak Counterparty Profile: WindForce’s rating is constrained by the weak credit profile of its key offtaker CEB, the sole electricity transmitter and distributor in Sri Lanka, despite CEB’s improved financial performance. CEB’s rating is ultimately contingent upon support from the Sri Lankan sovereign (Long-Term Local-Currency Issuer Default Rating (IDR): CCC-; Long-Term Foreign-Currency IDR: Restricted Default) and its weak credit profile.

WindForce derived an average 80% of its EBIT from CEB in FY23-9MFY 724, with balance coming from its Ugandan operations. We expect WindForce’s cash flow exposure to CEB to increase further in FY25-FY27 with the commissioning of a 1OMW solar project in Kebithigollewa and a 1OOMW solar power plant in Hambantota in Sri Lanka.

Risks to Cost-Reflective Tariffs: Fitch believes there are risks to consistent implementation of cost-reflective tariffs, affecting the credit profile of domestic power generation companies. This is because of the government’s competing priorities: managing inflation, CEB’s financial health and the state’s own finances. We have assumed WindForce’s receivables days will deteriorate to 100 by FY27 as a result, but a longer record of consistent implementation could support a moderation of these risks.

The Sri Lankan government has implemented a cost-reflective tariff mechanism since mid-2022, to ensure CEB’s operating costs and interest obligations are covered. The new mechanism supports break-even operating cash flow for CEB, as of its latest financial year. This has enabled CEB to clear part of its overdue payments to trade creditors over the past 12 months. The tariff regulator – the Public Utilities Commission of Sri Lanka – approved lower tariffs by an average of 21.9% in its March 2024 review, which is a greater decrease than CEB’s proposal, reflecting the risks.

Investments Weigh on Free Cashflow: We estimate negative free cash flow (FCF) in FY25-FY27, due mainly to high capex and investments. This is despite improving operating cash flow from a shorter working capital cycle and newly commissioned projects. WindForce expects to invest USD12 million for the 30% stake in a LOOMW solar project in Hambantota in FY25-FY27.

Moderate Leverage; Adequate Coverage:
We forecast WindForce’s EBITDA net leverage to rise to 2.5x in FY25 (QMFY24: 2.0x) and 4.2x in FY26 on higher capex. However, interest coverage should strengthen to 3.7x in FY25 (9YMFY24: 3.1x) due to falling domestic interest rates even as debt increases. Sri Lanka’s monthly Average Weighted Prime Lending Rate fell to 10% by end-April 2024, from the peak of 28% in December 2022. Around 70% of
WindForce’s loans carried variable rates as of end-2023.

Steady EBITDA Margin: We expect the EBITDA margin to remain around 70% in FY25-FY27. WindForce’s power purchase agreements (PPA) offer long-term cash flow visibility, with a weighted-average remaining contract life of around 12 years, but production volume is affected by seasonal and climatic patterns. This is mitigated by its diversified portfolio, comprising wind (74MW), solar (38MW) and hydro (15MW) power plants, totalling to 127MW excluding associates and joint ventures.

Derivation Summary

WindForce is rated two notches below domestic power producer and engineering, procurement and construction contractor Lakdhanavi Limited (‘‘A(Ika)/Stable). The difference is on account of Lakdhanavi’s larger operating scale, and geographic and business diversification.

Both Lakdhanavi and WindForce have significant exposure to CEB. However, Lakdhanavi has operations and maintenance (O&M) services, manufactures transformers and switchgears, and offers galvanizing services. We also believe CEB is likely to prioritise payments to Lakdhanavi in a stress scenario, given Lakdhanavi provides O&M services to one of Sri Lanka’s largest power plants, and is investing in a large liquefied natural gas power plant, both of which are critical to CEB’s future strategy.

Resus Energy PLC (BBB(Ika)/Stable), a domestic power producer, is rated one notch below WindForce. WindForce’s higher rating is driven by a comparatively better liquidity position with sufficient cash flow to cover near-term maturities and better diversification in power generation sources and geographies.

Vidullanka PLC (A+(Ika)/Stable) is a renewable power producer with operations in Sri Lanka (35MW) and Uganda (13MW). WindForce is rated three notches below Vidullanka, despite the latter’s smaller scale. Vidullanka has lower counterparty risk and lower exposure to CEB, as 80% of its EBIT came from its Uganda projects in FY23.

Key assumptions

Fitch’s Key Assumptions Within the Rating Case for WindForce:

– Revenue to increase by 14% in FY25, mainly driven by commissioning of 1OMW Kebithigollewa power plant and 15MW Hiruras power plant’s first full year of operation;

– EBITDA margin of around 70% in FY25 and FY26;

– Receivable days at 80 in FY25;

– Capex of LKR2.5 billion in FY25 and LKR6.0 billion in FY26;

– Investments of around LKR2.0 billion a year in FY25 and FY26 in associate companies;

– Dividend payout of 80% of prior year profit.

Rating sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade

-A sustained and substantial reduction in counterparty risk, as reflected in a significant improvement in CEB’s credit profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade

-Deterioration in liquidity, including due to delayed receivables collection or challenges in refinancing;

-EBITDA net leverage above 5.5x for a sustained period;

-EBITDA interest coverage below 1.5x for a sustained period.

Liquidity and debt structure

Liquidity Subject to Counterparty Health: WindForce’s liquidity is subject to timely collections of dues from CEB. It had around LKR2.9 billion readily available cash and cash equivalents as of end-2023, with around LKR6.3 billion of unused but uncommitted credit lines from domestic banks, against LKR2.2 billion of debt maturing in the next 12 months. Maturing debt mainly comprises the current portion of long-term debt obtained to fund the investments in its power plants.

We expect the company to generate negative FCF in the near-to-medium term due to high capex. However, WindForce has adequate access to domestic banks, as most banks are willing to provide longer-tenured facilities for the company’s operating power plants that have more than 10 years remaining under their PPAs.

Issuer profile

WindForce is a leading renewable power producer in Sri Lanka, with total installed power generation capacity of about 163MW (including its share of associates and joint ventures) as of end-March 2024.

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