Fitch reviews Aitken Spence ratings

Fitch Ratings Lanka said that it is reviewing Aitken Spence PLC's (ASP) senior unsecured notes' 'AA(lka)' National Long-term rating following the announcement of ASP's participation in the south container terminal development project in the Port of Colombo.

Fitch is seeking further information on the quantum of investment and its funding, coupled with the information on project cash flows and dividend inflows to ASP when the terminal commences operations in FY14.

In addition to the possible impact on ASP's credit metrics due to the investment, there is a structural subordination risk for ASP's creditors from the company's participation as a minority with a 30 percent stake in the terminal company and due to prior-ranking senior debt raised at the project level.

The project is expected to take approximately 30 months to be completed. Any dividends that ASP can expect to receive thereafter depend on the free cash generation from the new terminal after debt servicing, which is subject to any restrictions on distributions of dividends.

The company has not announced how its share of the investment would be financed. Fitch notes that the terminal is estimated to cost US $ 450 m (Rs 50 b), and expects that ASP will have to infuse up to Rs 4.5 b into the project company, being its share of the project equity.

Given the afore-highlighted issues, there is a possibility of a negative rating action if ASP's investment in the terminal project is largely funded by increased debt borrowings at the holding company.

As a holding company, ASP's ratings are largely driven by the cash flows it generates from dividend income from its investments.

Dividends from the hotels and leisure operations have been limited over the past few years and may continue to be so given the ongoing high investments in this sector. Fitch notes there is potential for ASP's cash flows from its power generation operations to fall after power purchase agreements of two of its three generation plants are renegotiated on expiry of existing contracts in FYE12 and FYE13. In FY10, ASP's power generation operations contributed over 75 percent of its total dividends.