A debt moratorium announced by the Sri Lanka government has resulted in a credit downrating of state-owned SriLankan Airlines (UL, Colombo Int’l) by Fitch Ratings, which believes it has triggered the commencement of a default-like process for the airline.
The US-based rating agency has given SriLankan Airlines’ USD175 million government-guaranteed 7% unsecured bonds due on June 25, 2024, a “C” rating, which means Fitch believes “a default or default-like process has begun, or the issuer is in standstill […] or payment capacity is irrevocably impaired”.
In a statement, Fitch said this followed the May 19, 2022, downgrade of Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from “C” to “RD”, meaning, in Fitch’s opinion, the country has experienced an uncured payment default or distressed debt exchange on a bond, loan, or other material financial obligation.
Fitch has also downgraded Sri Lanka’s foreign-currency bonds issued in international markets from “C” to its lowest rating of “D”, indicating that, in Fitch’s opinion, the country has entered into de facto bankruptcy.
“SriLankan Airlines’s guaranteed US dollar bonds are part of the debt moratorium announced on April 12, 2022, by the Government of Sri Lanka, on several categories of sovereign- and public sector entities’ external debt. The moratorium has therefore triggered the commencement of a default-like process for SriLankan Airlines, in Fitch’s view,” the agency said in a statement on May 20.
It said SriLankan Airlines’ bonds were rated “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 Country-Specific Treatment of Recovery Ratings criteria.
According to the agency, an upgrade of Sri Lanka’s sovereign rating and completion of a commercial debt restructuring that would normalise its relationship with the international financial community could lead to a Fitch ratings upgrade.
Historically a loss-making entity, SriLankan Airlines registered its first profitable fourth quarter since 2006 with a net profit of USD1.7 million for the quarter ended 31 March, 2022. This it attributed it to the scaling down of staff costs and overheads, the renegotiating of supplier contracts, an increase in cargo revenue, and capitalising on pent-up travel demand.
“We anticipate some headwinds in the first half of this financial year with high fuel prices and a short-term dip in demand to Sri Lanka,” SriLankan Airlines’ acting chief executive Richard Nuttall said. “We have factored in these challenges and are working towards minimising the impact with a strong business plan and a sound turnaround strategy to return to full-year profitability.
“Traffic is expected to recover fully by the end of the year as travel restrictions are eased off further. We will continue to support the tourism industry of Sri Lanka and be a catalyst for economic recovery.”