Fitch Ratings has downgraded Sri Lanka-based Resus Energy PLC’s National Long-Term Rating to “A(lka)”, from “A+(lka)”, with a Negative Outlook. Fitch has simultaneously downgraded the National Long-Term Rating of Resus's outstanding senior unsecured debentures to “A(lka)”, from “A+(lka)”.
The downgrade follows its expectation that Resus's financial flexibility will deteriorate, undermined by a steep rise in funding costs and working capital stress, which will weaken its credit metrics and liquidity, respectively. Fitch has calculated that Resus’s substantial variable-rate debt exposure will see its EBITDA interest cover drop to around 1.5x in the financial year ending March 2023 (FY23), from 3.4x in FY22, following the steep hikes in domestic interest rates.
The Negative Outlook reflects risks caused by continued payment delays by Resus’s sole counterparty – Ceylon Electricity Board (CEB, AA-(lka)/Stable). The delays have tightened Resus’s liquidity and elevated its refinancing risks, although the rating agency expected liquidity to improve once the CEB’s payments normalise following a consumer tariff hike in August 2022. Near-term liquidity should be further supported by Resus’s plans to avail of a moratorium for part of its debt under the Central Bank of Sri Lanka’s relief scheme for borrowers in select industries.
When it comes to steep interest rate hikes, Sri Lanka’s average prime lending rate surged to 25.3% by end-August 2022, from 9.5% at end-March 2022, impacting Resus’s borrowing costs and weakening its credit metrics. The aggressive tightening by the Central Bank, with policy rates increasing by 800bp since end-March, followed the country's rapid economic deterioration amid weakening external finances, acute currency depreciation, and high inflation.
Approximately 65% of Resus's debt outstanding was variable rate at end-1QFY23. The variable rate exposure could dampen the company’s cash flow, as the rating agency did not expect interest rates to ease in the near-term owing to persistent inflationary pressure and weak external finances.
Liquidity has plummeted amid worsening working capital, with receivables from the CEB reaching 293 days at end-1QFY23 (FY21: 152 days). The payment delays at the CEB stem from its diminished financial profile due to the absence of a cost-reflective tariff structure. That said, cash flow from the CEB should improve in 2HFY23 following the August 2022 tariff hike, helping to ease Resus’s liquidity pressure, Fitch stated.
However, the improvement in receivables is likely to be gradual, given the CEB’s billing cycle and large outstanding financial obligations. Fitch rating-case forecasts Resus’s receivable days to improve to 210 in FY23 and 150 in FY24. Fitch also believes energy-price reforms – likely a key component of the sovereign’s fiscal restructuring – can boost the CEB's financial profile over the medium term, though implementation risks remain.
Fitch downgrades Resus Energy
15 Sep 2022
Fitch downgrades Resus Energy
15 Sep 2022