ICRA Lanka Limited, Subsidiary of ICRA Limited, group company of Moody’s Investors Service, has reaffirmed the Issuer rating of [SL]A- (pronounced S L A minus1) with stable outlook for Construction Guarantee Fund (“CGF”/ “the Fund”).
ICRA Lanka reaffirms the rating of Construction Guarantee Fund, primarily by factoring in the Government of Sri Lanka (GOSL) ownership and the sovereign support to the Fund; coupled with the well-established acceptance and position of the Fund in the Sri Lankan construction sector with two decades of experience. ICRA Lanka notes the Fund’s unique operational model as a non-profit service organization in Sri Lanka, its relatively stringent underwriting standards, and its self-sustaining operational structure that requires minimal support from the GOSL.
This coupled with the entity’s senior management and governance system through a Board of Trustees, representing key public and private sector officials, has enabled the Fund to operate as an autonomous body without direct interference from the GOSL.
The reaffirmed rating strengths are partly offset by the continued downturn in the domestic construction sector, which is closely correlated with the macro-economic conditions of the country. Historically, the Fund’s bond exposure has been highly skewed towards the state funded construction contracts. Given the government’s fiscal constraints, ICRA Lanka views this exposure on a negative note as delayed payments from the government sector have affected the construction industry in Sri Lanka over the past few years.
Moreover, the small to medium scale construction contractors have been adversely affected by the continued downturn in the construction industry during this period under review. However, the Fund’s overall financial performance has not been significantly affected during CY2018/19, largely due to increased market share and the additional services that were offered by the Fund.
During CY2018/19, although, the Fund has experienced some claims due to industry downturn, the overall invocations remain at a lower level compared with the Fund’s capital position.
The reported contract-disputes during the past few years are largely due to employer’s fault to settle the payment on behalf of the contractors on a timely manner and therefore, this has also contributed to the lower invocation levels by the employers.
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