Fitch affirms SLT's 'BB' Rating

RATING: Fitch Ratings has affirmed Sri Lanka Telecom Limited's ("SLT") Long-term foreign currency Issuer Default rating ("IDR") at 'BB-' (BB minus) with a Negative Outlook.

Meanwhile, the agency also affirmed the company's 'BB-' (BB minus) Long-term local currency IDR and its 'AAA(lka)' National Long-term rating, both with Stable Outlooks.

At the same time, Fitch also affirmed the rating on SLT's existing USD100 million senior unsecured notes due 2009 at 'BB-' (BB minus).

SLT's ratings reflect its strong and improving financial profile as well as its diversified operations with a dominant share of the local access (74%) and international long distance ("ILD") markets (est.70%).

It also boasts the largest market share in internet and data services (est.65%).

Although SLT lost market share in the local access segment owing to its competitors being first to market with launching CDMA-based fixed-line services, the negative impact has been contained, with SLT reporting robust subscriber growth with its own fixed-wireless services launched in November 2005.

Its mobile arm, Mobitel, has turned around and is gaining subscribers at a rapid pace. Although SLT's traditional fixed-line business is expected to post only modest growth, fixed-wireless and mobile services are expected to underpin the company's earnings and cash flow growth over the medium term.

At the same time, the ratings consider the increasing competition in SLT's main business segments, sustained network related investments by both cellular and fixed-wireless competitors and the pressure on tariffs.

The ratings also acknowledge the uncertainties that persist in the regulatory environment, which is still developing.

Fitch says SLT's credit metrics are strong for the current ratings. As at end-H106, SLT had net adjusted leverage of 0.3x and FFO net interest cover of 12.8x. Its capital structure is sound with total adjusted debt to capitalisation of 38.2%.

Although SLT's capital expenditure has been in the range of 20%-35% of sales, it has continuously reported strong free cash flows. Fitch anticipates SLT will continue to post strong positive free cash flows and further improving its financial profile, notwithstanding the increasing competition in key business segments and capital expenditure of around Rs. 8 billion to Rs. 10 bn per annum over the short- to medium-term.

Fitch notes that SLT has sound liquidity and financial flexibility. At end-H106, SLT had cash reserves of LKR15.6bn against current maturities of only LKR3.7bn. Debt maturities peak in 2009 when the USD100 million bond is due to mature.

The only major contingent liability of SLT is in relation to a judgment delivered by a Sri Lankan court invalidating SLT's last tariff revision and necessitating the refund of its incremental billings from September 2003.