Ratings agency Fitch has downgraded the outlook of the senior unsecured Sri Lankan rupee notes issued by local diversified conglomerate Aitken Spence PLC (ASP) to "Negative," from "Stable." However, at the same time, Fitch upheld the "AA(lka)" National Long-Term rating already in place for these same notes.
According to Fitch's Rating Action and Commentary (RAC), this revised outlook reflects "concerns over the probability of a sizable reduction in the scale of ASP's existing power sector operations and the expectation of the more volatile hotel sector dividend that needs to be consistently upstreamed to the holding company having to replace the power sector dividend over the longer term."
On the other hand, Fitch also noted that it had continued ASP's "AA(lka)" rating due to an "expectation that ASP's core business segments will continue to generate adequate operating cash in the near term from its geographically and industry-wise diversified revenue and profit streams." This despite Fitch being convinced that ASP would continue to make "significant investments for its port venture (30% ownership)."
In the meantime, Fitch stated that it expects ASP's "next 24-month operating cash generation to be sufficient for its corresponding cash requirement including the repayment of these notes" with the same also applying to its "current headroom availability for financial leverage (total adjusted net debt/operating EBITDAR) at the holding company level." Also highlighted, "ASP's rating remains exposed to the state-owned Ceylon Electricity Board's (CEB) financial strength, which is the sole purchaser of its power output, albeit the latter's financials improved in 2010. The power purchase agreements (PPAs) have built-in safeguards along with the non-recourse nature of power sector debt to the holding company.
owever, Fitch notes that there has been no finalisation of discussions with CEB for the continuation of ASP's PPAs for its two 20MW plants, which will expire in 2012. CEB's own capacity is expected to improve with the new coal and hydro projects (450MW) and these two thermal power plants will be the first to come in for renegotiation, providing direction for CEB's future use of private thermal power plants. Furthermore, the recent declaration by ASP of the possibility of future dilution of its ownership and/or control of its 100MW thermal plant (74% owned) as may be determined by the Secretary to the Treasury based on the Sri Lanka Electricity Act No.20 of 2009, exposes the company to a significant event risk, which if triggered will warrant an immediate rating review."
It was also revealed that ASP's "new wind and mini hydro power projects will bring in additional debt of around Rs. 830 million, which will keep the sector leverage at current levels." As a consequence, Fitch noted that "ASP will have to maintain its current high power dividend (over 80% of total dividend income) through free cash flows generated from its 100MW plant, and continue this till 2015. Fitch sees that any decrease in this dividend inflow to be a negative rating driver."
Suggesting cash inflows from hotels and other areas were not adequate to replace a loss of power generation revenues, Fitch also revealed that "any significant additional borrowings for sizable new projects or any reduction in dividend income to group parent against Fitch's expectations can act as negative rating triggers. However, if ASP were to generate a sizable cash balance through an equity rights issue, power plant sale or if the power sector were to continue after renegotiations at similar profit levels, this may relieve pressure on the holding company's cash outflows."