Lakdhanavi continues to seek equity partner for US $ 190mn Sobhadanavi LNG plant

Lakdhanavi Limited, Sri Lanka’s largest independent power producer (IPP), will continue to seek an equity partner to dispose up to 49 percent of its liquid natural gas (LNG) project titled ‘Sobhadanavi’, in a bid to reduce the leverage of the company created by the debt-heavy project. 

An estimated US $ 190 million Sobhadanavi investment is funded via 30 percent equity by Lakdhanavi, with the balance raised through a project loan, according to a report by Fitch Ratings.

The company was last year seeking to divest only up to a 30 percent stake of the project. 

The 350-megawatt power plant being constructed in Kerawalapitiya is one of the two such LNG power plants planned for Sri Lanka, as part of the country’s long-term generation plan to meet the growing demand for power while reducing cost. 

The plant, which is scheduled to come online in 2024, is expected to cater to 13 percent of the country’s total power demand and is estimated to save up to Rs.12 billion annually or Rs.240 billion over a period of 20 years. 
Lakdhanavi, a subsidiary of LTL Holdings Private Limited (LTLH), which operates several power plants in Sri Lanka and Bangladesh, signed a power purchasing agreement with the Ceylon Electricity Board (CEB) for 20 years, providing it with the certainty over the cash flows out of the project. 

Fitch Ratings this week affirmed Lakdhanavi’s rating at AA+, with a Stable outlook, on the basis that the company along with its parent LTLH would maintain its net leverage below 5.5 times in the next few years, despite the debt-funded investments and amid sable cash flows generation ability from their leading market position in the operations and maintenance segment in the country’s power sector. 

Fitch derives Lakdhanavi’s rating based on the consolidated profile of its parent LTLH, considering the strong legal and operational linkages between the two entities. LTLH has two other subsidiaries—51 percent-owned Lakdhanavi Bangla Power Limited and 56 percent-owned Feni Lanka Limited. 

Given the scale and amount of debt needs to be raised for Sobhadanavi, Fitch estimates LTLH’s net leverage to rise to its rating sensitivity level set at 5.0 times by the financial year ended in March 2024, from 1.1 times in financial year ended in March 2021, narrowing the headroom available for the company to invest in any other project. 

“We believe this investment has materially weakened LTLH’s balance sheet and hence its ability to invest in similar projects in the near term,” said Fitch Ratings adding that a potential deposal of the project to the extent sought by the company would recreate rating headroom. 

“However, the credit profile could come under pressure, if LTLH continues its investment drive without taking adequate steps to strengthen its balance sheet,” Fitch added. 

However, Fitch expects Sobhadanavi to account for about 40 percent of the LTLH group gross profit when the project comes online, helping it to cut the leverage to around 2.5 times by 
FY 2025. 

At present, LTLH derives 55 percent of its gross profit from the CEB and this is expected to go up to 80 percent by FY 2025, when Sobhadanavi is in operation. 

“Sobhadanavi, which is one of the first liquid natural gas (LNG) power plants in the country, is important to the CEB to meet the current shortfall in power supply and move away from high-cost heavy-oil plants. Therefore, we expect the CEB to make payments to Sobhadanavi without delays,” Fitch said.