Fitch Ratings has assigned Sri Lanka Telecom PLC’s (SLT, AAA(lka)/Stable) proposed senior unsecured debenture issue of up to Rs 7 billion a National Long-Term Rating of ‘AAA(lka)’.
The debentures will have a tenor of 10 years and carry fixed coupons. The debentures will be listed on the Colombo Stock Exchange, with the proceeds to be used to refinance short-term debt and fund capex plans.
SLT’s senior unsecured debt is rated at the same level as its National Long-Term Rating, as the debentures rank equally with other senior unsecured obligations. The final rating is the same as the expected rating assigned on January 2,2018, and follows the receipt of documents conforming to information already received.
Fitch believes SLT’s 2018 operating EBITDAR margin could decline to 24% (2017 estimate: 28%) and its funds flow from operations (FFO) adjusted net leverage could deteriorate to 2.5x (2017 estimate: 1.9x) if it were to pay an additional Rs 3 billion tax for SLT’s fully owned subsidiary, Mobitel (Pvt) Ltd.’s mobile towers.
However, Fitch believes that such high taxes are unlikely to be implemented in full, and have not therefore factored these into our base case. Fitch expects SLT’s ratings to remain unaffected, even if the taxes are implemented, given the high ratings headroom.
The Sri Lankan government’s 2018 budget, announced on November 9 2017, proposes to tax mobile operators Rs 200,000 per tower each month.
Fitch expects a free cash flow (FCF) deficit during 2018-2020 (2017 estimate: Rs10 billion deficit), as cash flow from operations could fall short in funding large capex plans to expand the group’s optical fibre infrastructure and 3G/4G mobile networks.
Fitch expects capex to moderate to Rs 24 billion-25 billion per year after peaking at Rs 27 billion, or 36% of revenue, in 2017. SLT’s fibre investments are likely to have low returns due to the country’s low broadband tariffs. Dividends are likely to remain around LKR1.6 billion-1.8 billion.
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