International ratings agency Fitch this week upgraded Sri Lanka Telecom's (SLT's) foreign currency outlook to positive, from stable earlier, while at the same time maintaining its rating at "B+". Also revised was the local currency outlook, to stable from negative, which additionally had its corresponding rating affirmed at "BB-". Additionally, it was also noted that the telecom provider, which is controlled by Maxis of Malaysia, had maintained its "National Long-term rating (of) 'AAA(lka)' with a Stable Outlook".
According to Fitch, the foreign currency revision "reflects a similar change to the Outlook of Sri Lanka's foreign currency (issuer default rating) on 21 September 2010, as SLT's stand-alone credit profile is constrained by the sovereign". While the local currency upgrade was indicated to be a result of "improvements observed in Sri Lanka's macro economic conditions following the end of the civil war, and from a moderation of the heavy price-based competition among telecom operators after regulatory intervention on tariffs. These are expected to stem the fall in SLT's operating margins".
Also suggested was that the rating was indicative of the telco's "strong market shares in major operating segments backed by strong infrastructure". However, it was also concluded that "profitability has suffered since 2007 - EBITDA to sales has fallen t around 30% at present from 45% in 2007".
Nevertheless, according to Fitch, the company continues to generate a significant cashflows from operations, while its "financial leverage and coverage ratios (adjusted debt net of cash to operating EBITDAR of 0.2x and fund flow from operations to interest of 11.0x at June 2010, respectively) remain extremely strong for its ratings". Also indicated was that the company would "generate weak to negative free cash flows until 2011, mainly due to ongoing high capitalex associated with the transition to a next-generation network and mobile operations". This is over an 18-month to 24-month period.
In the meantime; "Fitch expects SLT to maintain its financial leverage below 1.0x and strong interest coverage with significant rating-headroom under its current ratings. SLT is yet to fully secure external funding for its capex programme; however, given its strong access to the bank loan market, Fitch does not expect capex funding or liquidity to be an issue". |
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