Sri Lanka Telecom hires Fitch and Standards & Poor’s for an international rating

Triple A rated Sri Lanka Telecom has signed up for a rating with two top international agencies, Fitch Ratings of USA and Standards & Poor’s as it embarks on an overseas roadshow for its upcoming debt issue next month. Triple A rated Sri Lanka Telecom has signed up for a rating with two top international agencies, Fitch Ratings of USA and Standards & Poor’s as it embarks on an overseas roadshow for its upcoming debt issue next month. The incumbent operator, which clinched an AAA (sri) national rating from Fitch Ratings Lanka, also got its ongoing five year debenture upgraded to a triple A.

AAA (sri) credit rating is the lowest expectation of credit risk and is assigned to firms which have an exceptionally strong capacity to honour financial commitments on time.

Roadshows for the US$ 100 mn five-year bond issue kicks off in the coming weeks, with meetings lined up in London, Singapore, Europe, Dubai, Hong Kong and Bharain.

The issue will be open for subscriptions, soon after the book building exercise. Standard Chartered and UBS Warburg will jointly manage the issue.

SLT’s bond issue is the biggest venture into the international debt market by a Sri Lankan company so far.

The funds raised are earmarked to finance SLT’s its network expansion and repay loans.

The dominant carrier’s group net profits slipped 14 percent to Rs. 647 mn for the first quarter ended March 31.

The drop reflected depreciation costs at Mobitel (its fully owned cellular subsidiary). But the company saw its net profits rise 29 percent to Rs. 988 mn during the same period, boosted by higher traffic volumes and a new streamlined billing system.

The company has not made an earnings forecast for 2004. But its ex-Chairman Thilanga Sumathipala told reporters last month that group profits for the first half would be around Rs. 2 bn and year end at Rs. 4 bn.

Last year, SLT’s net profits slipped 11 percent to Rs. 2.38 bn as a Rs. 800 mn early retirement scheme ate into profits.

The voluntary reduction scheme was part of SLT’s efforts to streamline operations.

SLT is 35 percent-owned by Japan’s Nippon Telegraph and Telephone Corp. while the Sri Lankan government controls 49.5 percent. The public owns 12 percent and the employees hold the balance shares.

Fitch says SLT’s triple A rating takes into account the teleco’s dominant market share (86 percent of fixed line market), capacity to offer data and other network services and the promising growth prospects in the wireless telecommunications sector, particularly mobile telephony.

Through its mobile subsidiary, SLT controls 15 percent of the cellular market.

SLT’s credit profile has improved in the last few years as the company repaid part of its debt stock. Additional borrowings were also low as the company pruned its capital expenditure, explains Fitch.

The group maintained healthy EBITDA (earnings before interest tax depreciation and amortisation) margins and a sound financial profile despite facing a deregulated operating environment. Total Debt/EBITDA at March 2004 was 1.4 times, down from 3 times three years ago, while EBITDA/Interest improved to 6 times, says Fitch.

“Credit metrics are likely to be pressured over the medium term. Additional borrowings to finance Mobitel’s expansion, together with debt repayments would result in the group’s free cash flow being negative over the next couple of years,” warns Fitch.

While favourably considering Mobitel’s expansion plans and prospects, Fitch also recognises the intensifying competition in the wireless telecommunications market.

SLT is also exposed to evolving regulatory changes and future regulatory determinations.

Other concerns include the fragile political climate, which may hamper the long-term growth prospects of the industry.

The second largest listed company on the Colombo bourse saw its share price dip Rs. 0.75 to Rs. 18.25 on trades of 340,600 on Wednesday.

-LBO Newsdesk: LBOEmail@vanguardlanka.com