SriLankan Airlines dollar bonds downgraded to ‘B-‘ after sovereign rating cut

AIRLINE WOES: State-run SriLankan Airlines is among firms badly hit by Coronavirus.

ECONOMYNEXT – Government guaranteed bond of state-run SriLankan Airlines (SLA) have been downgraded to ‘B-‘ after Sri Lanka’s rating was cut by a notch from ‘B’ by Fitch Ratings.

“The national carrier’s bonds are rated at the same level as SLA’s parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state,” the rating agency said.

Fitch said further increases in difficulties in foreign financing shown by “a narrowing of funding options and weaker refinancing capacity that threatens the ability to meet external debt repayments,’ would lead to further downgrades.

An upgrade could come if there was an improvement in “policy coherence and credibility, leading to more sustainable public and external finances” and better budgeting based on “a credible medium-term fiscal consolidation strategy.”

Sri Lanka slashed taxes from January 2020, undermining budgets in a bid to get a short term fiscal ‘stimulus’ and central bank instead of allowing rates to go up to maintain monetary stability also cut rates in January and started injecting liquidity from February triggering currency pressure.

The full statement is reproduced below

Fitch Downgrades SriLankan Airlines’ Government-
Guaranteed Bonds to ‘B-‘

Fitch Ratings – Singapore/Colombo – 28 Apr 2020: Fitch Ratings has downgraded the rating on SriLankan Airlines Limited’s (SLA) USD175 million government-guaranteed 7% unsecured bonds due 25 June 2024 to ‘B-‘, from ‘B’.

KEY RATING DRIVERS

The rating action follows the downgrade of Sri Lanka’s Long-Term Foreign- and Local Currency Issuer Default Ratings to ‘B-‘, from ‘B’, with a Negative Outlook; see ‘Fitch Downgrades Sri Lanka to ‘B-‘; Outlook Negative‘.

The national carrier’s bonds are rated at the same level as SLA’s parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state. The Sri Lankan government held 99.5% of SLA at end-2019 through direct and indirect holdings.

DERIVATION SUMMARY

Fitch has rated SLA’s US dollar-denominated bonds at the same level as the sovereign due
to the unconditional and irrevocable guarantee provided by the government. The rating is
not derived from the issuer’s Standalone Credit Profile and thus is not comparable with
that of industry peers.

RATING SENSITIVITIES

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

– An upgrade of the sovereign rating
Factors that could, individually or collectively, lead to negative rating action/downgrade:

– A downgrade of the sovereign rating
For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in
its rating action commentary of 24 April 2020

Factors that Could, Individually or Collectively, Lead to Negative Rating
Action/Downgrade:

– Further increase in external funding stress, reflected in a narrowing of funding options and weaker refinancing capacity that threatens the ability to meet external debt repayments

– Prolonged policy uncertainty that contributes to a loss of investor confidence

– Failure to arrest the upward trajectory of the general government debt/GDP ratio, potentially reflecting an inability to constrain the fiscal deficit

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

– Improvement in external finances, supported by higher non-debt inflows or a reduction
in external sovereign refinancing risks from an improved liability profile

– Improved policy coherence and credibility, leading to more sustainable public and
external finances and a reduction in the risk of debt distress

– Stronger public finances, underpinned by a credible medium-term fiscal consolidation
strategy

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