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Fitch downgrades Lakdhanavi to ‘AA-’

28 Jan 2022

Fitch Ratings has downgraded the Sri Lanka-based Lakdhanavi Ltd.’s national long-term rating to “AA-(lka)” from “AA+(lka)”. The outlook is Stable. The downgrade reflects the risk of disruptions to Lakdhanavi’s domestic operations from a potential fuel shortage and heightened counterparty risk due to its exposure to payments from the Sri Lankan Government (long-term foreign currency issuer default rating: “CC”) through state-owned Ceylon Electricity Board (CEB: “AA-(lka)”/Stable), amidst the country’s falling foreign currency reserves and weakening fiscal position. The downgrade also takes into account the company’s increasing exposure to the CEB in the next few years with the commissioning of the new liquefied natural gas (LNG) power plant, Sobadhanavi. Fitch believes this constrains the rating on Lakdhanavi to the same level as the CEB given the high counterparty concentration. Sri Lanka’s falling foreign currency reserves is creating challenges in importing fossil fuels, which drives around 50% of the country’s power generation. This has increased the risk that Lakdhanavi’s cash flows may be disrupted if its main customer, Yugadanavi, a large thermal power plant that provides 15% of the country’s power output to the CEB, faces operating challenges. Lakdhanavi derives around 40% of its gross profits from this plant, which is largely driven by capacity-based tariffs. However, if the plant is shut down, Lakdhanavi could lose around 25% of such gross profits, which is based on plant utilisation. In addition, the CEB may also have less incentive to make timely capacity tariff payments if the plant is not operational. Up until now, Lakdhanavi has not experienced any material payment delays from the plant. “We expect Lakdhanavi’s EBITDA from the CEB to rise to around 75% by the financial year ending 31 March 2025 (FY25) from around 50% in FY21, with the commissioning of the Sobadhanavi plant. We believe this will materially reduce Bangladesh’s contribution to Lakdhanavi's gross profits to around 15%, diluting the geographic and counterparty diversification. At present, the company does not have any firm plans for overseas expansion. Lakdhanavi has started construction of the Sobadhanavi plant,” Fitch added.  Fitch expects Lakdhanavi’s net leverage to rise to 5.9 times by FY24 from 1.1 times in FY21 due to its $ 190 million investment in the 350 MW Sobadhanavi power plant. The plant has secured a 20-year power purchase agreement (PPA) with the CEB. Lakdhanavi will fund 30% of the cost of the plant via equity and 70% from a project loan. Fitch believes this investment will materially reduce the group’s current cash reserves of $ 26-27 billion, which would have otherwise helped to significantly strengthen the liquidity position amid operational disruptions and possible payment delays.  


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