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Sunday July 14th, 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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UNESCO DG to discuss archaeological endeavours in Anuradhapura, Sri Lanka: President

ECONOMYNEXT – Sri Lanka’s president has said that he will discuss initiatives for long-term archaeological endeavours in the Anuradhapura city with visiting UNESCO Director General Audrey Azoulay.

Azoulay will visit Sri Lanka from July 16-19 and take part at the celebration of the 75th Anniversary of Sri Lanka’s membership of UNESCO at the Nelum Pokuna Theatre in Colombo.

She will also travel to UNESCO World Heritage Sites around the island, the Ministry of Foreign Affairs said.

“I have invited the Director General of UNESCO to visit Sri Lanka and discuss initiatives for long-term archaeological endeavours in the Anuradhapura city. Several universities overseas have shown interest in supporting us for these activities, and we are moving forward with their collaboration,” Ranil Wickremesinghe said.

“Anuradhapura boasts a rich history spanning over a millennium, once renowned as a hub of trade and economics. Preserving and exploring this ancient city’s archaeological treasures remains a significant endeavour.”

“New archaeological efforts in the Anuradhapura district are now imperative,” Wickremesinghe said during a ceremony to inaugurate a 150-kilowatt solar power system installed by the LTL Group at the Sri Maha Bodhiya premises in Anuradhapura on Saturday (13).

Wickremesinghe pointed out that UNESCO has undertaken extensive archaeological projects in Angkor Thom in Cambodia, and Luang Prabang in Laos.

“However, we have not taken the necessary steps to implement these activities in Anuradhapura city. Therefore, I have advised both the Department of Archaeology and the Cultural Triangle to undertake these initiatives.”

These efforts are part of a comprehensive program aimed at establishing Anuradhapura as a globally renowned city, Wickremesinghe said.

While Sigiriya has gained international fame, Sri Lanka has not adequately highlighted Anuradhapura’s historical significance as a major trade and economic center in the past, the president pointed out.

“Cities like Tanjore (Thanjavur), Madurai, and Sanchipuram are often discussed, yet Anuradhapura, the fourth city, has been overlooked. Therefore, it is crucial to develop Anuradhapura city.”

As part of these initiatives, preparations are underway to establish new hotels in Anuradhapura, which will contribute significantly to its development, Wickremesinghe said. (Colombo/Jul13/2024)

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Government committed to improving living conditions in Jaffna: Sri Lanka PM

ECONOMYNEXT – Sri Lanka’s prime minister, who is in Jaffna “to monitor the progress” and “get a little feedback” has said the government is committed to improving living conditions of the people in the northern peninsula.

“This government is dedicated to improving the living conditions of the Jaffna Peninsula,” Dinesh Gunawardena told a Jaffna District Coordinating Committee meeting on Friday, according to a statement by his media division.

“In order to increase the living conditions, we have embarked on an increase in most of the expenditure needed by the departments, and also special allocations for rural and urban development in the local government area.”

Nationalist Gunawardena met with Tamil politicians at the Jaffna Divisional Secretariat Office and participated in the distribution of rice and egg incubators for low income families.

“A special privilege to be with you all, in order to monitor the progress made by all of you, as well as to get a little feedback where we stand today in relation to the reports given.”

Gunawardena joins a string of leading political figures who have visited the north ahead of upcoming polls.

The government was, he said, “committed to improve the services and living conditions, therefore, to provide the necessary infrastructure for developments, which means much to your area.”

The prime minister said he appreciated the efforts of farmers because “farmers are all private sector, I would say. Let us not forget, farmers are all in the private sector, either in the ownership or in the tenancy. They are private contributors to the national development of the economy.”

The poverty numbers are “fairly managed” in the country. Gunawardena said, pointing out that poverty was a key problems in any economy. “Any country, you would agree with me, the richest country, in the United States even, food stamps have been given. So all economies the world are going through difficult situations in relation to the poor.

“We have to look after the poor especially in these remote villages of the Northern Province…”

Minister Douglas Devanada, MPs M A Sumanthiran, Angajan Ramanathan, C Vigneshwaran, Dharmalingam Siddharthan, and other officials participated in the meeting. (Colombo/Jul13/2024)

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Sri Lanka leader’s presidential campaign faces dilemma over coalition: sources

ECONOMYNEXT – Sri Lanka leader Ranil Wickremesinghe’s presidential election campaign is facing a dilemma over coalition due to rivalry parties with different political ideologies, sources said.

President Wickremesinghe is yet to announce his candidacy for the presidential poll which is expected to be declared by the island nation’s Election Commission after July 17.

However, his close allies and some ministers in the current coalition government have already started a campaign to promote him assuming that President Wickremesinghe will declare his candidacy.

Three sources who spoke to EconomyNext said legislators from the main opposition center-right Samagi Jana Balawegaya (SJB) are ready to join, but they do not want to be in coalition with the ruling Sri Lanka Podujna Peramuna (SLPP).

“SJB members who want to join Wickremesinghe are bit nervous because people wanted to oust SLPP in 2022 for their past sins including corruption and wrong economic policies,” on source who is in a member in the core campaign strategy group told EconomyNext.

Another source said majority of nationalist party SLPP are with the president, but a few key SLPP leaders do not want to back Wickremesinghe because of his market-led economic policies.

“SLPP does not want to be seen as backing Wickremesinghe’s privatization moves. So a few leaders are worried to join the campaign and have different idea of fielding their own campaign,” the second source who is indirectly involved with facilitating meeting between Wickremesinghe and legislators said.

The SJB is leaned towards somewhat liberal economic policies and has ensured to treat all ethnic people equally, while SLPP has backed a state-controlled economy and has given priority for ethnic majority Sinhala Buddhists.

UNDECIDED VOTERS

There is no formal and transparent survey to assess the popularity of possible presidential candidates.

However, an informal survey shows Opposition and SJB leader Sajith Premadasa is leading followed by Marxists Janatha Vimukthi Peramuna leader Anura Kumara Dissanayaka.

The same survey has shown a gradual gain for Wickremesinghe in the last three months.

“He is confident of winning, but he has to win most of the undecided voters for that,” a third source, who is in the campaign planning team, said.

“Still things are very fluid. Majority of the people still don’t understand the benefits of economic recovery and the country getting out of the debt default under the current president. We will have a clear picture by end of next month.”

Wickremesinghe was elected as the president in July 2022 by the parliament after his predecessor Gotabaya Rajapaksa fled the country in fear of his life amid mass protests and outside the presidential palace.

Wickremesinghe has implemented some tough economic reforms including raising taxes, imposing new taxes, freezing recruitments to state-owned companies, and privatizing loss making government-owned entities in line with commitments agreed with the IMF.

UNPOPULOUR REFORMS

Those reforms have made him unpopulour mainly among government employees and lower income groups.

He has raised the salaries of government employees from April this year while has introduced a new transfer payment called Aswesuma for lower income and vulnerable groups.

Sri Lanka faced an unprecedented economic crisis with a sovereign debt default in 2022. But it has recovered faster than expected under Wickremesinghe administration with difficult and unpopulour reforms.

People protested against the SLPP-led government in 2022 and ousted then leader Gotabaya Rajapaksa and all his relatives from the key ministerial positions for their alleged involvement in corruption and wrong economic policies.

The SLPP which had more than two-third majority in the parliament after 2020 general election, is worried about its perception and electoral performance after the economic crisis.

Analysts say Wickremesinghe has a greater chance to win if he join with SJB than SLPP because of the SLPP’s negative perception.

Sources, however, said they are in discussions with both SLPP and SJB legislators to agree on a common programme for Wickremesinghe’s presidency.

Presidential election is likely to be held either in October first week or second week, Election Commission officials say.

Wickremesinghe lost the parliamentary election in 2020, but entered the parliament in 2021 using the solo seat his party won through the national list.  (Colombo/July 13/2024)

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