Business Times

Fitch upholds SLT's 'AAA(lka)' / Stable

Local fixed line incumbent Sri Lanka Telecom (SLT) has had its long-term national rating maintained as "AAA(lka)", with a stable outlook, by Fitch. Additionally, the company's long term foreign currency (FC) and local currency (LC) issuer default ratings (IDR) have also been upheld as "B+" / Positive and "BB-" / Stable, respectively.

According to Fitch's Rating and Action Commentary (RAC), the telco's FC IDR and outlook is "capped by Sri Lanka's Country Ceiling of 'B+'" with its positive outlook also reflecting that of the sovereign FC IDR.Also revealed was that a "negative rating action may result if net leverage (net adjusted debt/EBITDAR) exceeds 2.5x and 1.5x for FC and LC IDRs, respectively, on a sustained basis. As the FC IDR 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% stake in SLT) - is able to offset the influence by [the government], which directly and indirectly owns more than 51% in SLT. This is because a high level of government ownership would normally constrain the ratings at the sovereign level," Fitch said.

The RAC also indicated that "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 2010, it had 40.6% and 24.4% of the country's fixed line and mobile subscribers respectively. The company also has a dominant market share of international long-distance and IP and data-related services."

The result was that "SLT's consolidated revenues and EBITDA improved 4% and 8% respectively during the nine months to September 2010 (9M10) after the Telecommunications Regulatory Authority of Sri Lanka (TRCSL) introduced floor pricing (off-net calls at Rs 2 per minute and on-net calls at Rs 1 per minute) and established an interconnection regime in the country."

Fitch attributes revenue growth to the mobile and broadband segments. It however also cautioned; "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.

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