Fitch affirms SriLankan Airlines’ government guaranteed bonds at ‘C’

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Fitch Ratings has affirmed the rating on SriLankan Airlines Limited’s (SLA) USD175 million government-guaranteed 7% unsecured bonds due 25 June 2024 at ‘C’.

The affirmation follows the 19 May 2022 downgrade of Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘RD’ from ‘C’, and the downgrade of its foreign-currency bonds issued in international markets to ‘D’ from ‘C’. For details on the sovereign rating action, see our commentary Fitch Downgrades Sri Lanka to ‘RD’, published 19 May 2022.

KEY RATING DRIVERS

SLA in Default-Like Process: SLA’s guaranteed bonds are part of the debt moratorium announced on 12 April 2022 by the government of Sri Lanka, on several categories of sovereign- and public sector entities’ external debt.

The moratorium has therefore triggered the commencement of a default-like process for SLA, in Fitch’s view. Bonds Factor in Recovery Prospects: SLA’s bonds are rated ‘C’ factoring in Fitch’s view of average- to- below average recovery prospects following a default, in line with the agency’s Corporates Recovery Ratings and Instrument Ratings criteria, and CountrySpecific Treatment of Recovery Ratings criteria.

Ratings assigned to bonds of issuers who are very close to default show little distinction between RR4-RR6. Therefore, Fitch has not assigned a Recovery Rating to the bond.

DERIVATION SUMMARY

SLA’s US dollar bonds are part of the Government of Sri Lanka’s debt moratorium. SLA’s bond rating based on Fitch’s assessment of average- to below average recovery prospects to investors, based on Fitch’s Corporates Recovery Ratings and Instrument Ratings Criteria, and Country-Specific Treatment of Recovery Ratings Criteria.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the sovereign rating Factors that could, individually or collectively, lead to negative rating action/downgrade: Negative rating actions are not possible, as the rating is at the lowest level applicable to corporate debt instruments For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in our Rating Action Commentary of 19 May 2022.

Factors that could, individually or collectively, lead to negative rating action/downgrade: Negative rating actions are not possible, as ratings are at their lowest level. Factors that could, individually or collectively, lead to positive rating action/upgrade: – Completion of a commercial debt restructuring that Fitch judges to have normalised the relationship with the international financial community.

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