Fitch retains SLTs BB- rating; estimates court ruling to cost Rs 3.0 bn

October 11, 2006 (LBO) – Fitch Ratings affirmed Sri Lanka Telecom’s foreign currency debt as ‘BB-‘ negative outlook, while the telco’s local currency debt remains at AAA (lka), with a stable outlook. The ratings also acknowledge the uncertainties that persist in the regulatory environment, which is still developing. The risk evaluator also retained the BB- rating assigned to SLT’s 100 million dollar debenture which expires in 2009.

SLT’s ratings reflect its strong and improving financial profile as well as its diversified operations with a 74 percent share of the local fixedline market.

The telco, which is 35.2 percent owned by Japan’s NTT, commands 70 percent of the international voice market and 65 percent of the island’s data and internet services.

However, the only major contingent liability so far is in relation to a judgment delivered by a Sri Lankan court, which overturned SLTs last tariff increase and ordered a refund on billings from September 2003.

SLT’s subsequent appeal on the ruling is pending before the Supreme Court.

Fitch estimates SLT’s potential net refunds to be in the range of 3.0 billion rupees for the 21 months to June 2005 (roughly around 5.0 billion rupees up to September 2006).

“Although an outflow of this magnitude would weaken SLT’s leverage, it would still remain comfortable for the current rating level.”

In the event that the company is required to revert to pre-September 2003 tariffs, SLT can use the index-adjusted formula to readjust the tariff back to current levels.

Despite being a late entrant to the CDMA (Code Division Multiple Access) market, which offers fixedline services using mobile technology, SLT has recovered somewhat, the risk evaluator said Wednesday.

Its mobile arm, Mobitel, has turned around and is gaining subscribers at a rapid pace.

Although SLT’s traditional fixed-line business is expected to post only modest growth, fixed-wireless and mobile services are expected to underpin the company’s earnings and cash flow growth over the medium term.

At the same time, the ratings consider the increasing competition in SLT’s main business segments, sustained network related investments by both cellular and fixed-wireless competitors and the pressure on tariffs.