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Thursday April 18th, 2024

Sri Lanka IPP rating outlook cut by Fitch over CEB payment delays

ECONOMYNEXT – Fitch Ratings has cut the outlook on an ‘A+(lka)’ rating of Sri Lanka’s Resus Energy, an independent power producer selling to state-run Ceylon Electricity Board, over payments delays due to forex shortages faced by the utility.

The outlook has been lowered to ‘Negative’ from ‘Stable’.

Fitch confirmed the IPPs National Long-Term Rating at ‘A+(lka)’, and an ‘A+(lka)’ rating on proposed senior unsecured debentures.

Liquidity may weaken if the CEB, Resus’s sole buyer of power, delays payments.

“CEB is facing heightened challenges in importing fossil fuels, which drive around 50% of the country’s power generation, amid the country’s falling foreign-currency reserves,” the Fitch said.

“We expect CEB to prioritise payments towards sourcing feed stock at the expense of operational creditors such as Resus.

“However, Resus’ liquidity position should improve if it is able to refinance some of its near-term maturities through a planned LKR1.2 billion debenture issue.

Resus is expected to boost revenues by 30 percent over tow years with additional capacity.

The full statement is reproduced below:

Fitch Revises Outlook on Resus Energy to Negative; Affirms ‘A+(lka)’ Rating

Fitch Ratings – Colombo – 26 Jan 2022: Fitch Ratings has revised the Outlook on Sri Lankan power producer Resus Energy PLC’s National Long-Term Rating to Negative from Stable. Fitch has simultaneously affirmed the National Long-Term Rating at ‘A+(lka)’, and the ‘A+(lka)’ rating on Resus’ proposed senior unsecured debentures.

The Negative Outlook reflects the potential weakening in Resus’s leverage and liquidity due to payment delays from its sole counterparty Ceylon Electricity Board (CEB: AA-(lka)/Stable). CEB is facing heightened challenges in importing fossil fuels, which drive around 50% of the country’s power generation, amid the country’s falling foreign-currency reserves.

We expect CEB to prioritise payments towards sourcing feed stock at the expense of operational creditors such as Resus. However, Resus’ liquidity position should improve if it is able to refinance some of its near-term maturities through a planned LKR1.2 billion debenture issue.

KEY RATING DRIVERS

Challenging Macroeconomic Environment: Sri Lanka’s economic performance is likely to weaken in 2022 due to the challenging external position and pressure on its exchange rate pressure. Foreign currency shortages in 2021 hampered food and fuel imports, and continued external liquidity stress could worsen supply shortages, hurting economic activity. We expect GDP growth to slow to 2.0% in 2022, from an estimated 3.6% in 2021, before recovering to 4.3% in 2023 partly due to base effects and a gradual easing of domestic pressures, although downside risks to our forecasts remain.

Payment Delays Could Hamper Liquidity: Resus receives 100% of its revenue from CEB and any delays in payments could worsen the company’s already tight liquidity position. Resus has not seen a material increase in its receivables until end-December 2021, but pressure on CEB has mounted since. We expect Resus’ receivable days to increase to 180 days in the next 12-18 months, from 152 days at the end of the financial year to 31 March 2021 (FYE21).

Resus’ ability to refinance some of its short-term maturities through commercial paper issuance and new bank facilities could be hampered if its collection cycle deteriorates for a sustained period.
Small Scale: Resus’s scale will remain small even when installed capacity doubles to 29MW by FY23 (FY21: 14.5MW), although the expansion should drive revenue up by 30% a year over the next two years. Resus accounts for only 0.3% of Sri Lanka’s installed power capacity and generation, and we do not expect a significant improvement in the contribution in the next few years despite the capacity additions. We also believe the small scale could affect Resus’ bargaining power with counterparties and its ability to receive timely payments compared with larger power generators.

Leverage to Stabilise from FY23: We expect Resus’ leverage, defined as net debt/EBITDA, to rise to 6.2x in FY22 (FY21: 4.6x) due to the company’s LKR1.6 billion investment to expand solar power capacity by 12MW and payment delays from CEB. After FY22, we expect leverage to moderate to 4.0x-4.5x, helped by increasing cash flows from new projects that will offset capex. Resus does not have any confirmed projects lined up after FY23, but we have assumed annual capex of around LKR700 million to account for possible expansions.

DERIVATION SUMMARY

Resus is rated at the same levels as local cable manufacturer Sierra Cables PLC (A+(lka)/Stable) but with a Negative Outlook to reflect the high counterparty risk stemming from its exposure to CEB and the potential impact on the company’s liquidity position. Sierra’s liquidity is more manageable with cash on hand covering near-term contractual maturities. However, Sierra’s cash flow is more cyclical than Resus’ as it is exposed to the construction and infrastructure sector and it also faces challenges in importing raw materials. Imports form around 90% of Sierra’s raw-material requirements.

Resus is rated one notch below leading domestic power producer and engineering, procurement and construction company Lakdhanavi Limited (AA-(lka)/Stable), which has a larger operating scale and better geographic and business diversification.

We believe CEB may prioritise payments to Lakdhanavi, which is the operation and maintenance provider for one of the largest power plants in the country, and because of its investments in LNG power plants, which are critical for CEB’s future strategy. Resus, on the other hand, contributes less than 1% to Sri Lanka’s power generation.

KEY ASSUMPTIONS

Fitch’s Key Assumptions Within Our Rating Case for the Issuer:

– Revenue to increase by around 30% a year over the next two years with new capacity additions;

– EBITDA margin to expand 350 bp by FY23, driven by increased contribution from the high-margin solar segment

– Receivable days to increase to 180 days in FY22 and FY23 as we expect CEB to delay payments

– Annual capex outflow of LKR1.5 billion in FY22 to support the new capacity additions. Capex to be minimal in FY23 at LKR200 million as company looks to preserve cash until new projects are cash generative. After FY24, annual capex of around LKR700 million a year to support expansion.

-Dividend pay-out of LKR80 million a year.

RATING SENSITIVITIES

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

– Material weakening in the counterparty credit risk profile

– Significant deterioration in the receivable position, resulting in net debt/EBITDA above 5.0x for a sustained period, or coverage, defined as EBITDA/interest paid, below 2.0x (FYE21: 2.6x) for a sustained period.

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

– The Outlook will be revised to Stable if there is sustained reduction in the risks to its receivables and a substantial improvement in the Sri Lanka sovereign’s macroeconomic environment.

– Net debt/ EBIDTA remains below 5.0x for a sustained period.

– EBITDA interest cover of 2.0x or above for a sustained period.

LIQUIDITY AND DEBT STRUCTURE

Large Debt Maturities: Resus had LKR21 million of unrestricted cash available at end-September 2021 to meet LKR1.1 billion of debt maturing in the next 12 months. Around LKR600 million of Resus’s debt maturities are short-term working-capital lines, which we expect will be rolled over by banks. Resus expects to meet the remaining contractual maturities of LKR465 million through internally generated cash, already negotiated refinancing facilities of around 190 million, unused credit lines of LKR25 million and by issuing LKR250 million of commercial paper.

We believe Resus’s ability to raise funds via issuance of commercial paper will depend on market conditions and prevailing interest rates, which have been rising. Resus’s refinancing capabilities remain adequate, 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. However, a longer working-capital cycle due to payment delays from CEB could make refinancing challenging. Resus plans to issue LKR1.2 billion of debentures to ease the current liquidity pressures.

ISSUER PROFILE

Resus is a small power producer in Sri Lanka with an expanding portfolio of assets. The company had an installed capacity of 14.5MW, spread across hydro (12.5MW) and solar (2MW), as of 31 March 2021.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

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Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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