Fitch affirms Dialog Axiata’s ‘AAA(lka)’ rating despite tax change

Fitch Ratings has affirmed Sri Lanka-based telecoms company Dialog Axiata PLC’s (Dialog) ‘AAA(lka)’ National Long-Term Rating. The Outlook is Stable.

Fitch believes that Dialog’s stand-alone credit profile of ‘AA+(lka)’ will come under pressure if it were to pay additional recurring and one-off taxes proposed in the Sri Lankan government’s interim budget announced in February 2015. We believe that Dialog’s 2015 operating EBITDAR margin will decline to around 23%-24% (2014: 33%) and its funds flow from operation (FFO)-adjusted net leverage will deteriorate to around 3.0x (2014: 1.3x), if it were to pay around LKR10bn in additional taxes - including LKR7bn-8bn in recurring and LKR3bn in one-off taxes.

Tax Changes Credit Negative: The proposed one-off and recurring taxes on the Sri Lankan telecoms sector raise regulatory risks and could result in lower profitability and higher financial leverage for all Sri Lankan telcos. The agency has revised its outlook on the sector to negative from stable.

The interim budget proposes a one-off "super gains" tax of 25% on profit, and a tax of LKR250m (USD1.8m) on each mobile operator. The proposals also shift the burden of recurring telecom levies of 25% on prepaid voice and 10% on data revenue on to the telcos from consumers. Any increase in tariffs by a telco is subject to approval by the telecoms regulator. A one-off tax of LKR1bn (USD7.5m) is also proposed on companies offering satellite direct-to-home (DTH) TV with more than 50,000 subscribers.

Rating Still AAA(lka): Fitch believes that Dialog still warrants a ‘AAA(lka)’ support-driven rating despite pressure on its stand-alone credit profile. The support-driven rating is based on Fitch’s assessment of strong operational and strategic linkages with its 83% parent, Axiata Group Berhad (Axiata) of Malaysia, which has a stronger credit profile. Linkages include sharing key management personnel, a common brand name and common creditors, which can result in reputation risk to Axiata should Dialog fail.

Market Position Intact: Dialog’s stand-alone profile is still underpinned by its market-leading position in Sri Lanka’s mobile and pay-TV industries. Its market position will probably strengthen following the tax changes as smaller telcos that are unprofitable could look to exit the market. Fitch expects Dialog’s leverage will start improving from 2016 towards 2.6x-2.7x in the absence of any further one-off taxes. Also, we believe that Dialog could reduce its capital expenditure in response to the additional taxes. The company’s capex/revenue ratio fell to 23% in 2014 from 44% in 2013.

Industry to Consolidate: We believe that the dramatic tax changes will hasten industry consolidation with the number of telcos possibly reducing to three from five. Two smaller unprofitable operators - Hutchison Lanka and Bharti Airtel Limited’s (BBB-/Stable) Sri Lanka subsidiary, Airtel Lanka - may exit the industry. We believe that market leaders Dialog and Sri Lanka Telecom PLC (BB-/Stable) could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets.
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Sri Lankan shares end at 5-wk low; turnover hits 1-yr low

(Reuters) - Sri Lankan shares fell for the 10th straight session on Friday to a five-week closing low, with the day's turnover slumping to a one-year low, as investor worries over rising interest rates weighed on sentiment.

The main stock index ended 0.25 percent lower, or 17.82 points weaker, at 7,091.25, its lowest close since Feb. 5, extending the fall to 3.09 percent in the last ten sessions.

The day's turnover stood at 265.9 million rupees ($2 million), the lowest since March. 21 last year and less than a fifth of this year's daily average of 1.37 billion rupees.

"Nothing is happening and there is no investor interest at all," said Dimantha Mathew, manager, research at First Capital Equities (pvt) Ltd, adding investors are waiting for the rising interest rates to settle.

Stockbrokers also said most market participants were away due to a local annual cricket match in Colombo.

Dealers said the market was closely monitoring interest rates amid heavy government borrowing. Sri Lanka's new government has borrowed more than $1 billion in four days through Thursday, which economists have blamed on poor revenue and higher expenditure.

The heavy borrowing has resulted in a spike in market interest rates.

Yields on t-bills rose between 21 basis points and 38 basis points at a weekly auction on Wednesday with the 91-day t-bill yield rising to a 14-month high of 7.10 percent.

Foreign investors were net buyers of 24.1 million rupees worth of shares, extending the year-to-date foreign inflow to 2.58 billion rupees.

Shares in leading fixed line telephone operator Sri Lanka Telecom Plc fell 2.77 percent while Bukit Darah Company fell 2.36 percent. 

($1 = 132.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

RBI, Sri Lankan central bank enter $1.5 bln currency swaps

(Reuters) - The Reserve Bank of India has entered a $1.5 billion currency swap agreement with the central bank of Sri Lanka, Prime Minister Narendra Modi said on Friday after meeting Sri Lankan leader Maithripala Sirisena.

"This will help keep the Sri Lankan rupee stable," Modi told reporters.

Sri Lanka rupee has been under pressure since early January and fallen around 1.5 percent so far this year despite the central bank defended it with selling dollars.

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Douglas Busvine)

Janashakthi amalgamates Orient Finance with Bartleet Finance

Under the Sri Lanka Central Bank’s master plan to consolidate the financial sector companies, Janashakthi PLC, earlier known as Janashakthi Limited, which had controlling interests over Orient Finance PLC, has entered into an agreement with Bartleets Transcapital Limited to acquire 86.79 per cent or 6,639,998 issues ordinary share capital of Bartleet Finance PLC with the aim of amalgamating Orient Finance PLC with Bartleet Finance PLC.

Janashakthi Limited has acquired 86.79 per cent shares of Bartleet Finance PLC on 22 January 2015 and thus holds 99.78 per cent voting rights of the company.
www.adaderana.lk

No faith on PM’s committee?

A group of representatives from companies involved in financial market activities say that it is hard for them to have faith on the committee appointed by Prime minister Ranil Wickremesinghe regarding the controversial Treasury Bond issue.

Different opinions expressed regarding the Treasury Bond issue which was declared on the 27th Feb – 2015 and the Prime Minister after having consulted the President over the phone decided to appoint a three member committee to investigate the matters concerning the above issue.

The company representatives say that although it was President Maithripala Sirisena who advised the Presidential secretary to look into the issue, it had changed and the committee was later appointed by the Prime minister.

They say that doubts are being raised whether this is a plan to shelve the issue.

Noting that they are doubtful whether the appointed panel has specialised knowledge on the subject, the representatives say that instead, it is more apt for the President to appoint a panel comprising of individuals with expertise on financial market activities.
www.srilankamirror.lk

Ranil took Mahendran’s responsibility - Rajitha

Cabinet Spokesperson, Minister Rajitha Senaratne says that Prime Minister Ranil Wickremesinghe has taken responsibility over Arjuna Mahendran’s appointment as Central Bank Governor due to continuous opposition over the appointment.

The Minister said that objections were raised by him even at a Cabinet meeting over the appointment.

However, Senaratne noted that Prime Minister Ranil Wickremesinghe had made the appointment claiming he would take full responsibility on the matter.

Mahendran is currently in the midst of controversy over alleged"insider trading" in the latest Treasury bond issue of the Central Bank. 

www.srilankamirror.lk

Rupee should also be allowed to fall - Major currencies decline between 7%-16%

By Paneetha Ameresekere

Ceylon Finance Today: The Central Bank of Sri Lanka (CBSL) allowing interest rates to rise in order to stave off pressure on the rupee from depreciating is not enough to take the flak off the local currency, market sources told Ceylon FT.

In tandem with allowing rates to rise, it also should allow the rupee to depreciate, so as to ease pressure on the local currency which is being artificially propped up, they said.

This has to be looked at in the context that all major currencies have depreciated against the US dollar since Christmas 2014, sources said.

For instance the common currency euro, which on Christmas Eve was trading at US$ 1.25 to the euro has since fallen by 16% to US$ 1.05. Similarly, the Singapore dollar which was trading at US$ 1.29 to the US dollar has further declined to US$ 1.38, a seven per cent depreciation and the Japanese Yen from 105 yen to one US dollar to 120 yen currently, a fall of 14.3%.

Sources however justified government borrowings amounting to over Rs 100 billion made from the Treasury (T) bill and T bond market this week alone, saying those are borrowings made at a relatively cheaper rate to pay off a Rs 77 billion maturing six year T bond, borrowed at a higher weighted average yield (interest rate) of 16% which realizes on Sunday 15 March.

Those funds were raised by issuing T bonds and T bills to the market of tenures as short as three months to as long as 30 years.

"Now a yield curve for the T bill and T bond market is also being developed," they said. 

"Under the previous regime, prior to such T bill and T bond auctions being held, CBSL used to tell us what the bid prices should be," the sources said. Now however there is no such administered regulation of interest rates. The market is allowed to 'rate discover' interest rates on their own, the sources said.

This is also one key measure to take the heat off the exchange rate, they said.
But, as aforesaid, that alone is insufficient, sources said.

Meanwhile, other sources said that under the previous regime, the yield curve was flat. But now, in reality, such a curve is developing.

CBSL Governor Arjuna Mahendran speaking at a seminar organized by Fitch recently said that the T bond market needs to develop a yield curve. "That way issuers in particular will be guided how to price their bonds," he said.

Dr. Koshi Mathai, IMF's previous Resident Representative to Sri Lanka, told reporters that bank borrowings were virtually unheard of, especially in mature markets, in the case of long-term borrowings. "Issuers go to the bond market to raise the required funds in such instances and not from banks," he said.

Also, in respect of such bank borrowings, there is a mismatch in the tenures, Mathai said. One borrows "short" (bank borrowings are generally of shorter tenures) for long-term projects, he said.

Meanwhile, Mahendran speaking at that seminar also said that a casino operator had wanted CBSL to increase the single borrower limit. "I told this operator to instead go to the bond market to raise the required funds," he said.
www.ceylontoday,lk