Sri Lankan debt

SriLankan Airlines' bond plans June take-off

Even though it will be guaranteed by the government, the crucial question for investors will be how much SriLankan Airlines will need to pay over the sovereign to get its bond away.
Will SriLankan Airlines' bond take off?
Will SriLankan Airlines' bond take off?

SriLankan Airlines, a troubled airline of a troubled government, hopes to issue its second US dollar bond later this month. The state-owned airlines’ litany of woes include being under criminal investigation, suffering losses for nearly a decade and lawsuits from foreign companies.

It plans to issue $175 million 5-year Reg S paper guaranteed by the Sri Lankan government later in June. If the sale goes ahead, proceeds will be used fully to redeem the airline's first US dollar bond of $175 million due to mature on June 27.

Price guidance for the proposed bond will be given on Thursday, FinanceAsia understands. The government guarantee means that the question for investors is how much over the sovereign will SriLankan Airlines have to pay.

The airlines’ earlier 5-year paper has a coupon of 5.3% and is currently yielding 8.69%.

US dollar bonds have been rare in this country in recent years, where only three were issued beween 2017 and March this year, all of them sovereign and totalling $6.4 billion, according to Dealogic.

Among the risk factors listed in the bond prospectus, the airlines disclosed that in February last year, Sri Lankan president Maithripala Sirisena had appointed a commission of inquiry to investigate alleged irregularities involving the company, the company’s catering subsidiary SriLankan Catering and the former government-owned low-cost carrier, Mihin Lanka between 2006 and 2018. 

“In addition, the company understands that the Criminal Investigation Department, Financial Crimes Investigation Department and Commission to Investigate Allegations of Bribery and Corruption are conducting investigations into various matters relating to the past transactions of the company,” the bond prospectus said.

This criminal investigation is scheduled to be completed by the end of the month.

SriLankan Airlines is also facing legal claims from Airbus for the cancellation of an order for four aircraft and from Rolls Royce over contracts related to engines.

Recent terrorist attacks in the country have significantly adversely affected the number of people travelling to Sri Lanka and the airlines’ passenger volume and revenue. In April, three churches and four hotels in Sri Lanka suffered bombings.

SriLankan Airlines has suffered losses every year since 2008. By the end of last year, it ran an accumulated loss of Rs220.8 billion ($1.25 billion). "Without support from the guarantor, it is unlikely that the company could continue to operate,” the prospectus said. 

However, the government of the South Asian nation has its own problems. Last December, both S&P and Fitch downgraded Sri Lanka's long-term foreign currency rating to B from B+. Last November, Moody’s downgraded Sri Lanka’s foreign currency issuer and senior unsecured ratings to B2 from B1.  

“The downgrade reflects heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation as a result of an ongoing political crisis following the president's sudden replacement of the prime minister on 26 October 2018,” Fitch said.

President Sirisena sacked prime minister Ranil Wickremesinghe in October last year then reinstated him in December. Sri Lanka’s spread levels relative to other Asian frontier markets suggest that its constitutional crisis added an 80bp to 100bp political risk premium. 

“The ongoing political upheaval, which has disrupted the normal functioning of parliament, exacerbates the country's external financing risks, amid a heavy external debt repayment schedule between 2019 and 2022,” the ratings agency added.

At the end of Q3 last year, the nation's foreign currency debt repayments of principal and interest stood at $20.9 billion for the period between 2019 and 2022, while its foreign-exchange reserves are currently $7.5 billion. Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate, Fitch pointed out.

S&P has warned that it could lower its rating of Sri Lanka further if the nation’s fiscal policy path deviates significantly from the rating agency’s projections, leading to a more rapid increase in net general government debt. “This could further lower confidence and affect the government's access to external financing,” it warned.

At least three Sri Lankan state-owned banks have failed to raise funds from foreign parties.

S&P has rated SriLankan Airlines' proposed bonds B, while Fitch is expected to assign a rating of B, in line with the sovereign. The airline currently owes an outstanding $704.7 million to banks and other creditors .

The joint lead managers of this proposed bond are Credit Suisse and Standard Chartered.

 

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