Fitch cuts SLT’S rating on sovereign downgrade
Fitch Ratings has downgraded Sri Lanka Telecom PLC’S (SLT) Long-term Foreignand Local-currency Issuer Default Ratings (IDRS) to ‘B’ from ‘B+’. The Outlook is Stable.
The agency has affirmed SLT’S National Long-term Rating at ‘Aaa(lka)’ with a Stable Outlook. Fitch has also affirmed the national rating at ‘Aaa(lka)’ on the Rs.7 billion debt programme.
The rating action follows Fitch’s downgrade of Sri Lanka’s Long-term Foreign- and Local Currency IDRS to ‘B’ from ‘B+’.
SLT’S IDRS are constrained by Sri Lanka’s IDRS as per Fitch’s Government-related Entities Rating Criteria, as the state holds a majority stake in SLT directly and indirectly and exercises significant influence on its operating and financial profile.
SLT’S second-biggest shareholder, Malaysia’s Usaha Tegas Sdn Bhd at 44.9 percent has no special provisions in its shareholder agreement to dilute the government’s significant influence over SLT.
SLT’S standalone credit profile, assessed by Fitch at ‘BB’, is stronger than that of its owner, reflecting the company’s market-leading position in fixed-line services and secondlargest position in mobile, along with its ownership of an extensive opticalfibre network.
The standalone profile is also underpinned by its mid-singledigit percentage growth prospects, moderate estimated 2018 FFO adjusted net leverage of 1.7x and stable operating EBITDAR margin.
Fitch sees SLT’S status, ownership
and control by the Sri Lankan sovereign as ‘Strong’. The state’s ownership gives it significant influence over operating and financial policies.
Fitch views the support record and expectations for the likelihood of state support for SLT as ‘Strong’, given its strategic importance in expanding the country’s fibre infrastructure. Historically, SLT has not required tangible financial support due to its healthy financial profile.
Meanwhile, Fitch sees the sociopolitical implications of a default by SLT as ‘Moderate’ due to the presence of three other privately owned telcos. However, it could affect the fixedline market because SLT acts as a policy company to invest in fibre networks across the island to support the government’s vision of fibre-based Internet for all households.
Fitch also sees the financial implications of a default as ‘Strong’, as a financial default by SLT may have an impact on the availability and cost of financing options for other government-related entities.
Fitch expects SLT to have negative free cash flow (FCF) during 20192020 (estimated 2018 negative FCF of Rs.2 billion-3 billion) as cash flow from operations may be insufficient to fund large capex plans to expand the fibre infrastructure and 4G mobile networks.
SLT’S 2019 capex is likely to remain high, at around 28-30 percent of revenue, as it aims to complete its 4G population coverage to around 95 percent by end-2019.
Fitch expects SLT to continue to invest in expanding fibre coverage as it aims to connect about one million homes by 2020-2021, from an existing 70,000 homes currently enable.
Typically, SLT would need to lay fibre for at least two million homes to half of the households to be connected. Fitch expects SLT’S fibre investments to have low returns due to the country’s low broadband tariffs. Dividends are likely to remain around Rs.1.6 billion-1.8 billion in the next two to three years.
Fitch expects SLT’S revenue to grow by a mid-single-digit percentage during 2019-2020 (barring any tax shocks), driven by data and fixedbroadband growth.
The rating agency also expects 4G smartphone penetration to improve from the current 25 percent with the proliferation of cheaper Chinese phones.
SLT’S revenue rose strongly by 6.5 percent in the first nine months of 2018, driven by fixed broadband and mobile usage after a temporary usage slump in 2017 due to higher taxes on voice and data. We expect the government’s recent announcement on the removal of floor rates for voice call charges to have only a limited impact on growth.