Sri Lanka rated telco market with highest regulatory risk

Dec 02, 2009 (LBO) – Sri Lanka has been rated the telecommunications market with the highest regulatory risk score in the Asia-Pacific region, according to a new survey by Fitch Ratings.

It said Fitch’s Regulatory Risk Score provides an indication of how the regulatory environment impacts the ability of an operator to generate free cash flow (FCF).

This in turn affects the rating process, as a credit rating is Fitch’s opinion about the future ability of a company to generate free cash flow to repay its debts.

“Notably, Australia and Sri Lanka receive the highest risk score under the incumbent and second-entrant classifications, whereas Malaysia and Hong Kong (second-entrant) are assessed as having the lowest regulatory risk,” the report said.

The incumbent operators typically score lower (implying a lower risk) than the corresponding second-entrants for each market, largely due to state ownership or a legacy regulatory bias which has resulted in a more favourable environment for the incumbents.

In the risk scores on a combined basis, when averaging the separate incumbent and second-entrant risk scores, “Sri Lanka markedly stands out as the market with the highest regulatory risk score, followed by Australia and South Korea,” Fitch said.

“Political and social policy risks are notably high in Sri Lanka, and are therefore a major adverse rating factor for the Sri Lankan operators.”

Markets in which Fitch believes there is a high degree of regulatory uncertainty include Indonesia and Sri Lanka.

The Fitch report has assessed the telecom regulatory risk environment for 13 markets across Asia-Pacific and concluded that Sri Lanka, Australia and South Korea have the highest regulatory risk on a comparative basis, whereas Malaysia has the lowest.

“A high regulatory risk score of 6 or above denotes that the regulatory environment has a significantly negative impact on the operator’s ability to generate Free Cash Flow,” said Matt Jamieson, Senior Director and Head of Fitch’s Asia Pacific Telecommunications, Media and Technology team.

“In contrast a low score below 3 denotes a potentially positive impact on FCF.”

Fitch said that as a general guideline, and as indicated by the absence of “Low” risk scores (with the exception of the incumbent operator in Malaysia), it believes regulatory considerations typically have a negative or constraining effect on the operators’ ability to generate FCF, and therefore on its overall rating analysis.

The rating agency said no rating changes are expected due to the publication of the report.

Regulatory considerations alone do not determine the final rating, which also includes a thorough review of quantitative factors like revenue growth, margins, cash flow-generation, and financial ratios.

Fitch said other qualitative factors – including industry risk, operating environment, market position, management quality and corporate governance — all combine to determine the final rating outcome.