Fitch Ratings-Colombo/Mumbai/Singapore-03 August 2012: Fitch Ratings Lanka has affirmed Sri Lanka-based Aitken Spence PLC’s (ASP) senior unsecured notes at National Long-Term ‘AA(lka)’ rating with Negative Outlook. ASP is the holding company of diverse assets in power generation, tourism, cargo and logistics, and services.
The rating reflects ASP’s continued strong consolidated earnings and dividend inflows from its domestic power generation assets. Its 100MW power plant located in the township of Embilipitiya made a significant contribution to aggregate dividends in FY12 (year end March) and FY11. Further, this cash flow is assured over the medium term, as the power purchase agreement (PPA) between ASP and the State of Sri Lanka, which governs the operations of this plant, does not come up for renewal until June 2015.
The Negative Outlook reflects potential project-related and commissioning risks on ASP’s new power-sector investments in Bangladesh, such as delays and cost overruns that could delay or impede expected project-cash generation and dividend payments. However, Fitch takes some comfort from the high quality of the stakeholders involved, strong demand for private-sector power generation capacity in Bangladesh as well as ASP’s track record in running similar operations.
The Negative Outlook also reflects continued uncertainty surrounding the renewal terms of the PPA on ASP’s 24MW local power plant in Matara, and consequently the State’s medium-term stance regarding oil power-driven plants given their high generation cost. However, this risk is partly mitigated by strong growth of domestic electricity demand, the lower reliability of power plants owned by the State and potential commissioning delays to these State-owned projects between 2014 and 2016.
ASP’s capex will increase considerably in FY13 and FY14, largely on account of its new power investments in Bangladesh. The company expects to fund a majority of these investments using debt, which will increase leverage (measured as adjusted debt net of cash/operating EBITDAR) at a group (ASP and its subsidiaries) – and ASP level. Despite this, the group’s current strong balance sheet is likely to help sustain medium-term leverage below 3.5x (FYE12 leverage: 1.5x).