Fitch affirms Sri Lanka Telecom at B+, outlook positive

Fitch Ratings has affirmed Sri Lanka Telecom PLC's (SLT) long-term foreign currency (LTFC) issuer default rating (IDR) at B+. The outlook is positive. At the same time, the agency has affirmed SLT's long-term local currency (LTLC) IDR at 'BB-' and its national long-term rating at AAA(lka).

The outlook for LC IDR and national rating is stable. SLT's LTFC IDR is capped by Sri Lanka's country ceiling of B+ and the positive outlook reflects that on the sovereign LTFC IDR.

SLT's ratings continue to be supported by its position as the fixed-line incumbent in Sri Lanka and by its adequate market share, through subsidiary Mobitel, in a moderately growing mobile telecom market. At end-September, it had 40.6 percent and 24.4percent of the country's fixed line and mobile subscribers.

The company also has a dominant market share of international long-distance and IP and data-related services. SLT's consolidated revenues and EBITDA improved four percent and eight percent during the nine months to September 2010.

The Telecommunications Regulatory Authority of Sri Lanka (TRCSL) introduced floor pricing (off-net calls at Rs 2 per minute and on-net calls at Re 1 per minute) and established an interconnection regime in the country. The mobile and broadband segments are largely responsible for driving the growth in SLT's consolidated revenue profile.

Despite the positive measures adopted by the regulator in terms of floor-pricing and the interconnection regime in 2010, Fitch notes that regulatory uncertainty continues to prevail.

Given the overcrowded nature of the local mobile industry, there is a risk that price competition will intensify if the regulatory tariff floor is removed. The government hopes to lower the floor tariff on local off-net calls to Rs 1.50 in mid-2011 from the current Rs 2.00.

SLT's capex is expected to increase during 2011 to expand coverage and capacity, as well as to make the transition to an IP-based next generation network (NGN).

However, barring any substantial increase in cash returns to shareholders, SLT should be able to return to positive FCF generation in 2012 once capex moderates.

Fitch expects SLT to maintain a strong financial profile and credit metrics appropriate for its current ratings and its net leverage below 1x over the short to medium-term.

SLT's liquidity is comfortable with cash and equivalents of Rs 7.8bn at end September and ready access to banks for funding, against maturities of Rs 1.8bn in 2011.

A negative rating action may result if net leverage (net adjusted debt/EBITDAR) exceeds 2.5x and 1.5x for FC and LC IDRs, on a sustained basis. As the FCIDR is constrained by the country ceiling, an upgrade of the sovereign rating will result in an upgrade of SLT's FC IDR.

The possibility of an upgrade in SLT's LC IDR will depend on the agency's view on the extent to which the presence of a large minority shareholder - Usaha Tegas(holding a 44.9 percent stake in SLT) - is able to offset the influence by the government, which directly and indirectly owns more than 51percent in SLT.

This is because a high level of government ownership would normally constrain the ratings at the sovereign level.