S&P Global Ratings keeps Sri Lanka in selective default territory

• Affirms ‘SD/SD’ long and short-term foreign currency and ‘CCC+/C’ long and short-term local currency sovereign credit ratings
• Says keeping rating at SD as government appears to be still in early stages of restructuring a US $ 175mn bond issued by SriLankan Airlines that it guarantees

While Sri Lanka welcomed the credit rating upgrades by Fitch Ratings and Moody’s Investors Service, which placed the island nation out of the default status, S&P Global Ratings maintained its selective default (SD) sovereign rating.

The rating agency affirmed its ‘SD/SD’ long and short-term foreign currency and ‘CCC+/C’ long and short-term local currency sovereign credit ratings on Sri Lanka.

The outlook on the long-term local currency rating is stable. It also revised upward the transfer and convertibility assessment on Sri Lanka to ‘CCC+’, from ‘CCC’ previously.

“We affirmed our long-term and short-term ‘SD’ foreign currency sovereign credit ratings because Sri Lanka’s government appears to be still in the early stages of restructuring a US $ 175 million bond issued by SriLankan Airlines that it guarantees,” S&P said in its commentary.

The agency noted that the stable outlook on the local currency rating reflects the balance between the improvements to Sri Lanka’s debt profile achieved through its domestic and external restructuring efforts and the ongoing risks to fiscal sustainability posed by the economic and fiscal pressures over the next 12 months.

S&P said it could lower the long-term local currency rating, if there are indications of a further restructuring of rupee-denominated obligations to commercial creditors. 

“Developments that could precede these indications include a rapid rise in inflation, a further rise in the government’s interest burden or a significantly worse fiscal performance by the government leading to local currency funding pressures,” it said.

Conversely, S&P said it could raise the long-term local currency rating, if the sustainability of the government’s large local currency debt stock improves. 

“This could be the case if, for example, the government’s fiscal metrics and the performance of the economy improve much more quickly than we expect,” it noted.

For foreign currency credit ratings, S&P said an upgrade would depend on Sri Lanka completing the restructuring of its remaining foreign currency-denominated commercial debt, including the US $ 175 million government-guaranteed bond issued by SriLankan Airlines.

Following the government’s distressed debt exchange on International Sovereign Bonds, S&P assigned the ‘CCC+’ issue ratings to three categories of Sri Lanka’s post-restructuring new notes: Amortising Governance-linked bonds maturing in 2035, Amortising U.S. dollar step-up bonds maturing in 2038 and Amortising PDI bonds maturing in 2030.