SLT to access domestic bank borrowings to roll-over foreign debt

Sri Lanka Telecom PLC (SLT), the leading fixed line operator will access domestic banking sources to refinance its maturing foreign currency debt, Fitch Ratings said in its latest report on Asia-Pacific telecom sector. 

According to Fitch Ratings, Sri Lanka Telecom has about Rs.53 billion of debt as at September 31, 2018, of which 25 percent is denominated in US dollar terms. 
“SLT plans to refinance short-term debt maturities of US $ 12 million through Sri Lankan rupee bank loans in 2H18,” the report stated. 

The move by the company to refinance foreign debt through rupee loans may be to minimize its exposure to currency volatility, as the company has booked foreign currency losses to the tune of Rs.1.1 billion during the first nine months of FY18/19.

Fitch maintains national long term rating of ‘AAA’ on SLT with a Stable Outlook, which was affirmed in November last year, considering the telco’s strong links to the State.

The treasury has 49.50 percent stake in SLT while Malaysia’s Usaha Tegas Sdn Bhd as the second largest shareholder holds 44.98 percent stake. The Employees’ Provident Fund has 1.40 percent stake being the third largest shareholder.

Fitch however cautioned that SLT’s National Long-Term Rating could come under pressure if it was to carry out a debt- funded acquisition of the smallest celco—Bharti Airtel Limited’s Sri Lankan subsidiary, Airtel Lanka. 

“However, any rating action will be based on the acquisition price, funding structure, and the financial and operating profile of the combined entity”, it added. 
Fitch maintains a Stable outlook on the Sri Lankan telecom sector.

Meanwhile, Fitch expects SLT to have a negative free cash flow during 2019 to 2020 with an estimated negative free cash flow of between Rs.2.0 billion to Rs.3.0 billion for 2018 due to large capital expenditure (capex) required to expand fibre infrastructure and 4G mobile networks. 

Fitch said that SLT’s capex is likely to remain significantly high during 2019— at an estimated 28 to 30 percent of revenues as it aims to complete its 4G population coverage to around 95 percent by the end of that year. 

“We expect SLT to continue to invest in expanding fibre coverage as it targets to connect about 1 million homes by 2020-2021 from an existing 70,000 homes currently. 

Typically, SLT would need to lay fibre for at least 2 million homes to get half of the households connected. We expect SLT’s fibre investments to have low returns due to the country’s low broadband tariffs”, Fitch said. 

However, the SLT group has cash worth Rs.12 billion and committed undrawn bank lines of Rs.13.5 billion which were sufficient to fund its short term debt of Rs.13.5 billion, Fitch showed. 

For the nine months ended on September 30, 2018 the group reported earnings of Rs.2.21 a share or Rs.3.99 billion from Rs.1.79 a share or Rs.3.2 billion a year ago. 

Revenues for the nine months were Rs.60.1 billion, up 6.6 percent year-on-year (YoY) fixed broadband and mobile usage and the operating profit (before depreciation and amortisation) was Rs.5.2 billion, up 53 percent YoY.

Fitch said barring any tax shocks, SLT’s revenues could grow by mid single digits during 2019 and 2020 driven by data and fixed broadband.

“We expect 4G smartphone penetration to improve from the current 25 percent with the proliferation of cheaper Chinese phones,” Fitch said adding that the government’s recent removal of floor rates on voice calls will have limited impact on growth.