Fitch downgrades SriLankan Airlines government-guaranteed bonds to ‘CCC’

Dec 01, 2020 (LBO) – Fitch Ratings has downgraded the rating on SriLankan Airlines Limited’s (SLA) USD175 million government-guaranteed 7% unsecured bonds due 25 June 2024 to ‘CCC’, from ‘B-‘.

KEY RATING DRIVERS

The rating action follows the downgrade of Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings to ‘CCC’, from ‘B-‘.

The national carrier’s bonds are rated at the same level as its parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state. The Sri Lankan government held 99.5% of SLA at end-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 thus is not comparable with that of industry peers.

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:

– A downgrade of the sovereign rating

For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in our Rating Action Commentary of 27 November 2020

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

External Finances: Improvement in external finances, supported by higher non-debt inflows or a reduction in external sovereign refinancing risks from an improved liability profile.

Public Finances: Stronger public finances, accompanied by a sustained decline in the general government debt to GDP ratio, closer to the ‘B’ median, underpinned by a credible medium-term fiscal consolidation strategy

Structural: Improved policy coherence and credibility, leading to more sustainable public and external finances and a reduction in the risk of debt distress

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

Increased signs of a probable default event, for instance from severe external liquidity stress, potentially reflected in an ongoing erosion of foreign exchange reserves and reduced capacity of the government to access external financing.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

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.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

SLA’s bonds are rated at the same level as SLA’s parent, the government of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the government.