Fitch Ratings has assigned Ceylon Electricity Board’s (CEB: AA+(lka)/Negative) proposed senior unsecured debenture issue of up to Rs 20 billion a National Long-Term Rating of ‘AA+(lka)’.
The debentures constitute direct, unsubordinated and senior unsecured obligations of CEB and are rated at the same level as the entity’s National Long- Term Rating. CEB’s ratings are equalised with that of its parent, the Sri Lankan sovereign (B/Negative), in line with Fitch’s Parent and Subsidiary Rating Linkage criteria. The equalisation takes into consideration CEB’s strategic importance to
Sri Lanka in ensuring power security and supply of affordable electricity to the public. The proposed debentures will be listed on the Colombo Stock Exchange and are expected to have a fixed coupon rate with a maturity of five years, with proceeds to be used for general working capital purposes.
Strong Linkages with State: Fitch assesses the linkages between CEB and the state to be strong, reflecting explicit guarantees and financial support through equity infusions and debt funding. The government also implicitly guarantees CEB’s project loans, which account for around 80% of its outstanding debt. These loans are extended by bilateral and multilateral agencies and routed through the government for development of power infrastructure. CEB’s strategic importance to the state stems from its position as the country’s sole grid operator and distributor and the generator of 80% of electricity in Sri Lanka.
Fitch believes the Sri Lankan government uses CEB as a vehicle to provide an essential public service. CEB provides electricity at subsidised tariffs without adequate and timely financial compensation from the government. We do not expect CEB’s linkages with its parent to weaken in the medium term as the provision of electricity at subsidised rates can be carried out only by a state entity such as CEB, because private companies would not be willing to bear losses.
Weak Standalone Profile: Fitch assesses CEB’s standalone credit profile to be much weaker than its support-driven rating and believes providing a notchspecific standalone credit view of CEB is difficult due to poor margin visibility and the need for continued state support to sustain operations.
CEB continues to make operating losses because tariffs are lower than its average generation, distribution and transmission costs - which compel CEB to borrow even to sustain its day-today operations.
The balance sheet is further weakened by significant investments on new generation capacity and network upgrades funded primarily through borrowings.
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