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Wednesday March 29th, 2023
Legal

Sri Lanka top court suggests changes to Colombo Port City Commission Bill

By

Imesh Ranasinghe

Tuesday May 18, 2021 4:25 pm

By Imesh Ranasinghe

Tuesday May 18, 2021 4:25 pm

ECONOMYNEXT – Sri Lanka’s Supreme Court has suggested a series of changes to set up a Colombo Port City Commission to run a special economic zone on land reclaimed by a Chinese company so that the law complies with the constitution.

Sri Lanka’s parliamentary speaker read out the changes suggested by the Supreme Court to avoid a two-thirds majority or a referendum.

The Court has suggested that the authority of regulatory agencies be preserved allowing them to make decisions and communicate the decisions instead of giving concurrence by compulsion as contained in the bill.

The SC also proposed changes preventing tax exemptions from being allowed outside the Colombo Port City area.

The proposed changes are as follows:

The determination of the Court as to the constitutionality of the Bill titled “Colombo Port City Economic Commission” is as follows:

(i) The provisions of Clauses 3(6), 30(3) second proviso, 55(2) and 58(1) of the Bill are inconsistent with Article 12(1) of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution.

However, the said inconsistencies will cease if the clauses are amended as follows:

Clause 3(6)

Page 3, Line 33- Delete the words “provide such concurrence” and substitute therefore the words “communicate its decision”

Existing Clause 3(6)

“The relevant Regulatory Authority from whom such concurrence is being sought by the Commission, shall as soon as practicable in the circumstances, as a matter of priority, provide such concurrence to the Commission.” 

Clause 30(3) second proviso

Page 30, Line 15 – – Delete the words “render such concurrence” and substitute therefore the words “communicate its decision” 

Existing Clause 30 (3) second proviso

“Provided further, the relevant Regulatory Authority from whom such concurrence is being sought by the Commission, shall as soon as practicable in the circumstances, as a matter of priority, render such concurrence to the Commission,” 

Clause 55(2) 

Page 49, Lines 16 and 17- Delete the words “provide such concurrence” and substitute therefore the words “communicate its decision” 

Existing Clause 55(2)-

“The Condominium Management Authority, shall as a matter of priority in the circumstances, provide such concurrence to the Commission.”

Clause 58(1) 

Page 52, Lines 9 and 10 – Delete the words “render such concurrence” and substitute therefore the words “communicate its decision”

Existing Clause 58(1)-

“Where the concurrence of the Securities and Exchange Commission is sought by the Commission, Securities and Exchange Commission shall as soon as practicable in the circumstances, as a matter of priority, render such concurrence to the Commission.”

 

(ii) the provisions of Clauses 3(5) proviso, 3(7), 6(1)(b), 30(3) first proviso, 71(1) and 74 [interpretation “Regulatory Authority”] of the Bill are inconsistent with Article 12(1) of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution. 

However, the said inconsistencies will cease if the clauses are amended as follows: 

Clause 3(5) proviso

Page 3, Line 27- Add the words “by the Commission” after the word “implementation” 

Existing Clause 3(5)- 

“The Commission shall, in the exercise, performance and discharge of its powers, duties and functions, where so required by the respective written laws applicable to any Regulatory Authority, obtain the concurrence of the relevant Regulatory Authority in respect of the subjects vested in or assigned to, such Regulatory Authority and to the extent specifically provided for in this Act: Provided that, the concurrence of the relevant Regulatory Authority sought shall be limited to the implementation, within the Area of Authority of the Colombo Port City, of the respective written laws applicable to such Regulatory Authority.”

Clause 6(1)(b)

Page 6, Line 27- Delete the word “overall” Page 6, Line 32- Delete the words “as the Commission considers necessary” 

Existing Clause 6(1)(b)-

 “to facilitate and exercise overall regulatory supervision and control over all investments and businesses in and from the Area of Authority of the Colombo Port City, in terms of this Act, with the concurrence, of the relevant Regulatory Authority, as the Commission considers necessary: Provided that, the concurrence of the relevant Regulatory Authority sought shall be limited to the implementation, within the Area of Authority of the Colombo Port City, of the respective written laws applicable to such authority;”

 Clause 30(3) first proviso 

Page 30, Line 9- Add the words “by the Commission” after the word “implementation” 

Existing Clause 30(3)-

“The Commission shall obtain the concurrence of any relevant Regulatory Authority in the process of granting such registration, licence, authorisation or other approval, where so required by the respective written laws applicable to such authority, in respect of the subjects vested in or assigned to, such Authority and to the extent specifically provided for in this Act: Provided that, the concurrence of the relevant Regulatory Authority sought shall be limited to the implementation, within the Area of Authority of the Colombo Port City,”

Clause 71 (1)

 Page 62, Line 7- Delete the words “as is considered necessary”

Existing Clause 71 (1)-

“The President or in the event that the subject of the Colombo Port City is assigned to a Minister, such Minister may, in consultation with the Commission and any relevant Regulatory Authority as is considered necessary, make regulations in respect of all matters for which regulations are required to be prescribed or authorised by this Act to be made.”

 Clause 74

Page 70, Lines 11 to 16- Delete the words commencing from “to the extent” to “Colombo Port City”

Existing Clause 74 page 70 Lines 1 to 16-

“Regulatory Authority” includes the Monetary Board of the Central Bank of Sri Lanka, the RegistrarGeneral of Companies, the Director-General of the Central Environmental Authority, the Controller of Immigration and Emigration, the DirectorGeneral of Customs, and such other regulatory authority or approving authority, and in whom the powers, duties and functions relating to the respective subjects which are dealt with in this Act are vested in or assigned to, in terms of any applicable written law to the extent provided in this Act. The relevant Regulatory Authority shall be limited to the implementation of the respective written laws applicable to such authorities, within the Area of Authority of the Colombo Port City;”

Clause 3(7) 

To be shifted after Clause 73 of the Bill and re-numbered as Clause 74. 

The new Clause 74 will now read as follows: 

“74. Nothing in this Act shall, unless otherwise specifically provided for in this Act, be deemed to restrict in any way the powers, duties and functions vested in such Regulatory Authority by any written law in relation to the Area of Authority of the Colombo Port City.” 

Clauses 74 and 75 Present Clauses 74 and 75 be re-numbered as Clauses 75 and 76 respectively

 

CLAUSES REQUIRING A REFERENDUM AND SPECIAL MAJORITY

 (iii) The provisions of Clauses 3(4), 6(1)(u), 68(l)(f) and 68(3)(a) are inconsistent with Article 76 read with Articles 3 and 4 of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution and approved by the People at a Referendum by virtue of the provisions of Article 83.”

However, the said inconsistencies will cease if the clauses are amended as follows: 

Clause 3(4) 

Page 3, Line I4 – Delete the word “for” and substitute therefore the words “to facilitate” Page 3, Lines I6 and I7- Delete the words “and Development Control Regulations”

Existing Clause 3(4)-

“The Commission shall be responsible for preparing, developing, amending, updating, publishing and enforcing all Community Rules and Development Control Regulations applicable within the Area of Authority of the Colombo Port City.”

Clause 6(1)(u) 

Page I0, Lines I4 to I5 – Insert the words “enforce the” before the words “Development Control Regulations”

Existing Clause 6(1)(u)-

 “to prepare, develop, amend, update, publish and enforce all Community Rules and Development Control Regulations as may be prescribed for applicability within the Area of Authority of the Colombo Port City;”

Clause 68 (1)(f)

 Page 60, Lines I to 3 – Delete in its entirety 

Existing Clause 68 (1)(f)-

“contravenes or fails to comply with any rule, code, direction or guideline made or issued in terms of this Act,”

Clause 68(3)(a) 

Page 60, Line 25- Delete the words “rule, direction, order or requirement issued or imposed”

Existing Clause 68(3)(a)-

 “Notwithstanding the provisions contained in any other written law, any person who contravenes or fails to comply with any provision of this Act or any regulation, rule, direction, order or requirement issued or imposed thereunder commits an offence under this Act and shall be liable on conviction after summary trial before a Magistrate to a fine of not less than rupees five hundred thousand and not more than rupees one million or to imprisonment for a term of not less than three months and not exceeding one year, or to both such fine and imprisonment”

 

CLAUSES REQUIRING A REFERENDUM AND SPECIAL MAJORITY

(iv) The provisions of Clause 52(3) read with Clauses 52(5) and 71(2)(p) of the Bill are inconsistent with Article 148 of the Constitution read with Articles 3, 4 and 76 of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution and approved by the People at a Referendum by virtue of the provisions of Article 83.”

 However, the said inconsistencies will cease if the clauses are amended as follows: 

Clause 52(3) 

Page 44, Line 20- Add the words “in accordance with the Regulations made under this Act … ” after the words “granted thereto ” 

Existing Clause 52(3)-

“Upon a business being so identified as a Business of Strategic Importance, exemptions or incentives as provided in this Part may be granted thereto, in so far as it relates to its operations in and from the Area of Authority of the Colombo Port City. In the case of tax-related exemptions, such exemptions may be granted, either in full or part, and from all or any of the enactments set out in Schedule II hereto.”

Clause 52(5) 

Page 44, Lines 29 to 3I -Delete in its entirety and replace with the following: 

“(5) Regulations may be made prescribing guidelines on the grant of exemptions or incentives, as provided for in this Part of this Act.”

Existing Clause 52(5)-

Regulations may be made prescribing any further guidelines as may be necessary on the grant of exemptions or incentives, as provided for in this Part of this Act”

Clause 71 (2)(p)

Page 65, Line I -delete the words “any further” 

Existing Clause 71 (2)(p)-

“specifying for the purposes of section 52, any further guidelines on the grant of exemptions or incentives to a Business of Strategic Importance;”

 

CLAUSES REQUIRING A SPECIAL MAJORITY

(v) The provisions of Clauses 30(1 ), 33(1 ), 40(2) and 71 (2)(1) of the Bill are inconsistent with Article 14(1)(h) of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution.

However, the said inconsistencies will cease if the clauses are amended as follows: 

Clause 30(1) 

Page 29, Line 24- Delete the words “or to visit”. 

Existing Clause 30(1)-

“Subject to Part VII, Part VIII and section 33 of this Act, the Commission shall be the Single Window Investment Facilitator responsible for the consideration and determination, in an expeditious and coordinated manner, whether to accept or reject for good reason, any application made to the Commission for a registration, licence, authorisation or other approval as may be necessary, to engage in any business in, to invest in, to reside in, to be employed in, or to visit, the Area of Authority of the Colombo Port city.”

Clause 33(1)

Page 31, Lines 32 and 33- Delete the words “or to visit” 

Existing Clause 33(1)-

“The Commission, as Single Window Investment Facilitator shall accept an application for and facilitate the processing of, any visa, entry permit or work permit, and other approvals as may be required by an authorised person, any consultant of, or any person specially authorised by an authorised person or an employee of an authorised person, and a person who intends to engage in business, to invest in, to reside in, to be employed in, or to visit the Area of Authority of the Colombo Port City, as may be necessary.”

Clause 40(2) 

Page 35, Line 37- Delete the words “when leaving” and substitute therefore the words “to be taken out of’ 

Existing Clause 40(2)-

“Any levy as may be required to be paid by a citizen of Sri Lanka or a resident on goods purchased at retail facilities as set out in subsection (1), when leaving the Area of Authority of Colombo Port City, shall be as prescribed.”

Clause 71 (2) (l)

Page 64, Lines 11 and 12- Delete the words “at the time of leaving the Area of Authority of the Colombo Port City”

Existing Clause 71 (2) (l)-

“specifying for the purposes of section 40, any levy as may be required to be paid by a citizen of Sri Lanka or a resident on goods purchased at retail facilities within the Area of Authority of the Colombo Port City at the time of leaving the Area of Authority of the Colombo Port City, and the procedure applicable to the conversion of payments made by a citizen of Sri Lanka or resident when using retail facilities or services at restaurants, cinemas, entertainment facilities, shopping facilities, or parking facilities, within the Area of Authority of the Colombo Port City, into any other designated foreign currency;”

 

CLAUSES REQUIRING A REFERENDUM AND SPECIAL MAJORITY

(vi) The provisions of Clause 53(2)(b) read with Clause 53(3)(b) of the Bill is inconsistent with Article 76 of the Constitution read with Articles 3 and 4 of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution and approved by the People at a Referendum by virtue of the provisions of Article 83.”

However, the said inconsistencies will cease if the clauses are amended as follows: 

Clause 53(2)(b) 

Page 45, Line 20- Delete the words “the specific enactments from those listed in” and substitute, therefore, the words “the specific exemptions from those enactments listed in”  Page 45, Line 22- Delete the words “exempted from being”

Existing Clause 53(2) and 53(2)(b)-

(2)The President or in the event that the subject of the Colombo Port City is assigned to a Minister, such Minister, may, having considered such recommendations, and having

regard to the national interest or in the interest of the advancement of the national economy, in consultation with the Minister, assigned the subject of Finance, take such steps as are necessary to inform the Cabinet of Ministers, of –

(2)(b)the specific enactments from those listed in Schedule II to this Act, that are proposed to be exempted from being applicable to such Business of Strategic Importance and any other incentives;

Clause 53(3)(b) 

Page 46, Line 10- Delete the words “the specific enactments from those listed in” and substitute therefor the words “the specific exemptions from those enactments listed in” Page 46, Line II- 

Delete the words “exempted from being” 

Existing Clause 53(3) and 53(3)(b)-

(3)Within two weeks from the date on which the Cabinet of Ministers approves the designation of a business as a Business of Strategic Importance and the granting of the exemptions or incentives so approved, the President or in the event that the subject of the Colombo Port City is assigned to a Minister, such Minister shall, by Order published in the Gazette, specify – 

(3)(b)the specific enactments from those listed in Schedule II to this Act, that are exempted from being applicable to such Business of Strategic Importance and any other incentives granted;”

 

CLAUSES REQUIRING SPECIAL MAJORITY

(vii) The provisions of Clauses 60(c) and Clause 60(f) of the Bill is inconsistent with Article 148 of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution.”

However, the said inconsistencies will cease if the clauses are amended as follows:

Clause 60(c)

Page 53, line 14- delete the word “taxes” and substitute therefor the word “rates” 

Existing Clause 60 and 60(c)-

The Estate Manager shall act under the direction and supervision of the Commission and exercise, perform and discharge the following powers, duties and functions,

(c)to facilitate the collection of area related taxes and levies imposed by the Commission within the Area of Authority of the Colombo Port City, as authorised by this Act, and collect fees and charges for services provided within the Area of Authority of the Colombo Port City, including management fees, utility charges, vehicle parking charges, user fees and such other fees or charges from authorised persons, employees of authorised persons, residents, occupiers and visitors within the Area of Authority of the Colombo Port City;”

Clause 60(f)

 Page 54, line 2 -delete the word “taxes” and substitute therefor the word “rates” 

Existing Clause 60(f)-

“to collect on behalf of the Commission, the local rates, taxes, levies and such other charges imposed by the Commission and applicable within the Area of Authority of the Colombo Port City, and credit the total of the sum so collected to a bank account as directed by the Commission;”

 

CLAUSES REQUIRING A SPECIAL MAJORITY

(viii) The provisions of Clause 37 of the Bill is inconsistent with Article 12(1) and 14(1)(g) of the Constitution and could be validly passed only with the special majority provided for in Article 84(2) of the Constitution.

 “However, the said inconsistency will cease if a new sub-clause is added to Clause 37 of the Bill restraining such authorised person making use of any exemptions or incentives granted under this Bill when conducting business outside the Area of Authority of the Colombo Port City to the detriment of similar businesses conducted outside such Area of Authority but within the territory of Sri Lanka.

We have examined the rest of the clauses of the Bill and determine that they are not inconsistent with the Constitution.” 

(Colombo/May18/2021)

 

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Markets

Sri Lanka stocks weaken for the second session on profit taking

Tuesday March 28, 2023 6:14 pm

Tuesday March 28, 2023 6:14 pm

ECONOMYNEXT – Sri Lanka’s stocks closed weaker on Tuesday for the second consecutive session mainly driven by month-end profit-taking by investors, according to brokers.

The main All Share Price Index (ASPI) closed down 0.56 percent or 51.81 points to 9,233.40.

The market has been on a downward trend since last week as investors are adopting a wait-and-see approach until more clarity is given regarding local debt restructuring after the International Monetary Fund approved the extended loan facility.

“The market is down as the selling trend continues,” said Ranjan Ranatunga of First Capital Holdings, speaking to EconomyNext.

“As there is a price decline in all shares across the board, combined with the month ending followed by margin calls, the market continued on a downward trend.”

The market generated a slow and thin turnover of 860 million rupees.

The main contributor to the turnover is Lanka IOC, following news that the Sri Lanka cabinet has granted approval for three oil companies from China, the United States, and Australia in collaboration with Shell Pl to lease 150 fuel stations for each company to operate in the local market.

The fears of debt restructuring mainly affected the banking and financial sectors, which dragged the index down for the day.

The market saw a net foreign inflow of 30.9 million rupees, and the total offshore inflows recorded so far in 2023 are 1.01 billion rupees.

The most liquid index, S&P SL20, closed 0.81 percent or 21.68 points down at 2,656.30.

The market saw a turnover of 860 million on Tuesday, below this year’s daily average of 1.8 billion rupees.

Top losers were Vallibel One, John Keells Holdings, and Hatton National Bank.

Analysts said the downward trend is expected to continue for the rest of the week as profit-taking is expected to continue. (Colombo/March28/2023)

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Bonds & Forex

Sri Lanka rupee closes weaker at 325/328 to dollar, bond yields up

Tuesday March 28, 2023 5:06 pm

Tuesday March 28, 2023 5:06 pm

ECONOMYNEXT – Sri Lanka’s treasury bond yields were up at close on Tuesday and the rupee closed weaker in the spot market, dealers said.

A 01.07.2025 bond was quoted at 31.20/60 percent on Tuesday, up from 30.75/31.00 percent on Monday.

A 15.09.2027 bond was quoted at 28.25/29.00 percent, up from 28.10/60 percent from Monday.

Sri Lanka rupee opened at 325/328 against the US dollar steady, from 322/325 from a day earlier. (Colombo/ March28/2023)

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Business

Sri Lanka Telecom on track rating upgrade track on planned stake sale: Fitch

Tuesday March 28, 2023 3:12 pm

Tuesday March 28, 2023 3:12 pm

ECONOMYNEXT – Sri Lanka Telecom has been place on watch for a possible rating upgrade after the government, which has defaulted on its sovereign debt said it will sell down its majority stake.

“The rating reflects the potential rating upside due to weakening linkages with SLT’s parent, the government of Sri Lanka (Long-Term Local-Currency Issuer Default Rating: CC), due to the government’s plan to sell its 49.5 percent stake in the company,” the rating agency said.

“Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which
may take more than six months.”

The agency said it expect SLT’s revenue growth to slow to a low single-digit percentage in 2023 amid weakening consumer spending due to consumers increasingly prioritising essential needs, such as food and medicine, as real income has fallen significantly following the currency depreciation and unprecedently high inflation.

The full statement is reproduced below;

Fitch Places Sri Lanka Telecom’s ‘A(lka)’ Rating on Watch Positive

Fitch Ratings – Colombo – 27 Mar 2023: Fitch Ratings has placed Sri Lanka Telecom PLC’s (SLT) National Long-Term Rating of ‘A(lka)’ on Rating Watch Positive (RWP).

The RWP reflects the potential rating upside due to weakening linkages with SLT’s parent, the government of Sri Lanka (Long-Term Local-Currency Issuer Default Rating: CC), due to the government’s plan to sell its 49.5% stake in the company. Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which may take more than six months.

SLT’s ratings are currently constrained by its parent’s weak credit profile under Fitch’s Parent and Subsidiary Linkage (PSL) Rating Criteria. SLT’s Standalone Credit Profile (SCP) is stronger than that of the state, reflecting the company’s market leadership in fixed-line services, second-largest share in mobile, ownership of an extensive optical fibre network and a strong financial profile. The extent of SLT’s rating upside, following the proposed disposal, will depend on the credit profile of its new parent, the linkage strength with SLT according to our PSL criteria, and the proposed funding structure.

KEY RATING DRIVERS

Disposal Plan: SLT announced on 20 March 2023 that the Sri Lankan cabinet has granted in-principle approval to sell the 49.5% stake in SLT held by the state. The disposal is part of a plan to restructure state-owned entities (SOEs) to improve the state’s financial position. SLT said steps have yet to be taken to identify potential buyers and it will take at least eight to 12 months to finalise the transaction. We believe the government will push through the disposal as SOE restructuring is an integral part of the IMF’s financial support to Sri Lanka.

Sovereign Ownership Pressures Rating: We assess the legal ring-fencing and access and control between SLT and the state as ‘Open’ under the PSL criteria, given the absence of regulatory or self-imposed ring-fencing of SLT’s cash flow and the government’s significant influence over the subsidiary’s operating and financial profile. SLT’s second- biggest shareholder, Malaysia-based Usaha Tegas Sdn Bhd with a 44.9% stake, has no special provisions in its shareholder agreement to dilute the government’s influence over SLT.

Higher Rating: However, the PSL criteria allows for a stronger subsidiary to be notched above the weaker parent’s consolidated profile in extreme situations, such as when a parent is in financial distress but the subsidiary continues to operate independently and its banking access appears unaffected. We do not believe SLT is at risk of default in the next 12 months, as it has sufficient liquidity and its debt does not carry cross-default clauses that can be triggered by the parent’s distress.

SLT’s ‘A(lka)’ rating therefore reflects its relativities with national peers, but is still below its SCP due to the drag from state ownership. We apply our PSL criteria because our Government-Related Entities (GRE) Rating Criteria states that in cases where the SCP of the GRE is higher than the government’s IDR, the relevant considerations of the PSL criteria will be applied to determine whether the IDR of the GRE is constrained or capped at the government’s rating level.

Weak Demand in 2023: We expect SLT’s revenue growth to slow to a low single-digit percentage in 2023 amid weakening consumer spending. Consumers are increasingly prioritising essential needs, such as food and medicine, as real income has fallen significantly following the currency depreciation and unprecedently high inflation. SLT’s subscriber numbers and minutes of usage have already fallen in 2022. Competition has also intensified, especially in the mobile segment, leading to lower realisation of recently introduced tariff hikes.

Weak demand should be offset to an extent by increased migration to SLT’s fibre-to-the- home (FTTH) network, from its own copper network, and subscriber additions. FTTH carries higher revenue per user than the copper network. SLT had 475,000 FTTH connections, a 35% increase yoy, by end-2022.

Weakening Profitability: We expect SLT’s EBITDA margin to narrow to around 34% in 2023 (2022: 35.6%) amid lower demand and ongoing cost escalations. All telecom operators increased tariffs by 20%-25% in late 2022 to tackle falling margins. However, the realisation into revenue remains weak, especially in the mobile segment, due to deep price cuts by one of the smaller operators and falling demand. SLT’s fixed-line business is able to maintain stable EBITDA margins due to the recent tariff hike and the FTTH segment’s higher revenue per user.

Leverage to Stabilise: We expect SLT’s EBITDA net leverage to remain around 1.3x in 2023 (2021: 0.9x, 2022: 1.3x) amid falling profitability. However, its leverage is strong for the rating. We expect capex of around LKR25.0 billion annually over 2023-2024 on network upgrades and expanding its fibre infrastructure.

Interest-Rate Hikes, Currency Depreciation Manageable: We expect SLT to maintain its EBITDA interest coverage closer to 4.0x over 2023-2024 (2022: 4.4x) despite interest rates rising almost threefold. Most of SLT’s debt is on variable interest rates, which will raise costs. SLT’s foreign-currency revenue, which accounts for 10%-12% of group revenue, is more than sufficient to meet the group’s foreign-currency operating expenses and interest costs. SLT had around USD10 million in foreign-currency debt at end-
December 2022, compared with USD40 million in foreign-currency cash deposits.

Sector Outlook Deteriorating: Fitch expects the average 2023 net debt/EBITDA ratio for SLT and mobile leader Dialog Axiata PLC (AAA(lka)/Stable) to remain around 1.3x (2022: 1.3x) amid weak margins and high capex. We expect sector revenue growth to slow to 8% in 2023 (2022: 15%), while the average 2023 EBITDA margin for SLT and Dialog should narrow to 31% (2022: 32%) amid low usage and high costs.

DERIVATION SUMMARY
SLT’s SCP benefits from market leadership in fixed-line services and the second-largest position in mobile, along with ownership of an extensive optical fibre network. SLT has lower exposure to the crowded mobile market and has more diverse service platforms than Dialog. However, Dialog has a larger revenue base, lower forecast EBITDA net leverage and a better free cash flow (FCF) profile than SLT. Dialog is rated at ‘AAA(lka)’, while SLT’s rating is under pressure because of the state’s weak credit profile.

SLT has a larger operating scale than leading alcoholic-beverage manufacturer Melstacorp PLC (AAA(lka)/Stable), which distributes spirits in Sri Lanka through its subsidiary, Distilleries Company of Sri Lanka PLC (AAA(lka)/Stable). Melstacorp is exposed to more regulatory risk in its spirits business because of increases in the excise tax, but this is counterbalanced by its entrenched market position and high entry barriers.

Consequently, the company can pass on cost inflation and maintain its operating EBITDA margin, supporting substantially stronger FCF generation than SLT.

KEY ASSUMPTIONS

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

– Revenue growth to slow to 4% in 2023 amid falling subscriber numbers and lower usage due to weakening consumer spending;

– Operating EBITDA margin to narrow by 150bp to 34% in 2023 due to higher costs and lower volume;

– SLT to continue capex on expanding its fibre and 4G network with LKR25 billion spent annually in 2023 and 2024;

– Effective tax rate of 28% from 2023;

– Dividend payout of 33% of net income over 2024-2025

RATING SENSITIVITIES

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

– Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which may take more than six months, and once Fitch has sufficient information on the new majority shareholder’s credit profile and linkages with SLT and the proposed funding structure.

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

– Fitch would remove the RWP and affirm the National Long-Term Rating at ‘A(lka)’ with a Stable Outlook if the proposed disposal does not proceed and the linkages with the state remain intact.

LIQUIDITY AND DEBT STRUCTURE

Manageable Liquidity: SLT’s unrestricted cash balance of LKR14 billion at end- December 2022 was sufficient to redeem its contractual maturities of around LKR11 billion. SLT’s short-term working-capital debt amounted to another LKR10.0 billion and we expect the company to roll over the facilities given its solid access to local banks.

Liquidity is further enhanced by about LKR15 billion in undrawn bank credit facilities, although these are uncommitted. SLT typically does not pay commitment fees on its undrawn lines, although we believe most banks will allow the company to draw down the funds because of its healthy credit profile.

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