Fitch Affirms SriLankan Airlines’ Government Guaranteed Bonds at ‘B’

Fitch Ratings has affirmed SriLankan Airlines Limited’s (SLA) USD175 million government guaranteed 7% unsecured bonds due 25 June 2024 at ‘B’.
KEY RATING DRIVERS
The airline’s bonds are rated at the same level as SLA’s parent, the government of Sri Lanka (B/Negative), due to the unconditional and irrevocable guarantee provided by the government. The state held 99.5% of SLA as at end-March 2019 through direct and indirect holdings. DERIVATION SUMMARY
Fitch has rated SLA’s US dollar 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 is therefore not comparable with that of industry peers.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action – An upgrade of the sovereign rating Developments that May, Individually or Collectively, Lead to Negative Rating Action – A downgrade of the sovereign rating For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in the agency’s Ratings Action Commentary of 18 December 2019: The main factors that individually, or collectively, could trigger a downgrade are: – Failure to place the gross general government debt/GDP ratio on a downward path due to wider budget deficits or the crystallisation on the sovereign balance sheet of contingent liabilities that are linked to state-owned entities or government-guaranteed debt. – Increase in external sovereign funding stresses that threaten the government’s ability to meet upcoming debt maturities, particularly in the event of a loss of confidence by international investors. – A further deterioration in policy coherence and credibility, leading to lower GDP growth and/or macroeconomic instability. The main factors that, individually or collectively, could lead to a revision of the Outlook to Stable: – Stronger public finances, underpinned by a credible medium-term fiscal strategy that places gross general government debt/GDP on a downward path, accompanied by higher government revenue. – Improvement in external finances, supported by lower net external debt or a reduction in refinancing risk; for example, from a lengthening of debt maturities or increased foreign-exchange reserves. – Improved macroeconomic policy coherence and credibility, evidenced by more predictable policy-making and a track record of meeting previously announced economic and financial targets.Criteria Variation
The rating on SLA’s bonds is derived from the rating of an entity covered by a group that does not assign Recovery Ratings. As a result, no Recovery Rating was assigned to SLA’s bond.

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