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

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 rating on the bonds is driven by the unconditional and irrevocable guarantee of the government of Sri Lanka (Long-Term Foreign-Currency Issuer Default Rating: ‘RD’).

SLA did not pay the interest due on 25 December 2023 on its guaranteed unsecured bonds, or during the 30-day grace period that followed, triggering an event of default. This is in addition to previous missed coupon payments in June 2023 and December 2022, and the events of default triggered via the 12 April 2022 announcement by the Sri Lankan government of a debt moratorium on several categories of sovereign and public-sector entities’ external debt, as well as the ensuing non-payment of interest on the government’s external debt.

SLA’s bonds are rated at ‘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. The bonds of issuers that are very close to default show little distinction between ‘RR4′ and’RR6’ recoveries. Therefore, Fitch has not assigned a Recovery Rating to the bond.

SLA’s US dollar bonds are part of the government of Sri Lanka’s debt moratorium. SLA’s bond rating is 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.

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 its Rating Action Commentary of 28 September 2023

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– The Local-Currency IDRs (Long-Term Local-Currency IDR at CCC-) would be downgraded if further restructuring or a default on local-currency debt becomes probable due to an unsustainable debt burden or inability to raise revenue.

– The Long-Term Foreign-Currency IDR is at the lowest level and cannot be downgraded further.

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

– A sustained decline in the general government debt-to-GDP ratio that is underpinned by strong implementation of a medium-term fiscal consolidation strategy and improved growth performance.

– Completion of the foreign-currency commercial debt restructuring that Fitch judges to have normalised the relationship with private-sector creditors may result in an upgrade

SLA is Sri Lanka’s national carrier and the government has full control over the company. SLA operates as a full-service carrier with a network covering Asia, Middle East, Europe and Australia. The airline’s fleet consists of 21 aircraft.

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