Fitch Ratings has affirmed SriLankan Airlines Limited's (SLA) USD 175 million government guaranteed 7% unsecured bonds due 25 June 2024 at 'CCC'.

KEY RATING DRIVERS

The airline's bonds are rated at the same level as SLA's parent, the government of Sri Lanka (CCC), due to the unconditional and irrevocable guarantee provided by the government. The state held 99.5% of SLA as at end-December 2020 through direct and indirect holdings.

DERIVATION SUMMARY

Fitch has rated SLA's US dollar bonds at the same level as the sovereign due to the unconditional and irrevocable guarantee provided by the government. The rating is not derived from the issuer's standalone credit profile, and is therefore not comparable with that of industry peers.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- An upgrade of the sovereign rating

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- A downgrade of the sovereign rating

For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in our Rating Action Commentary of 27 November 2020

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

- External Finances: Improvement in external finances, supported by higher non-debt inflows or a reduction in external sovereign refinancing risks from an improved liability profile.

- Public Finances: Stronger public finances, accompanied by a sustained decline in the general government debt to GDP ratio, closer to the 'B' median, underpinned by a credible medium-term fiscal consolidation strategy

-Structural: Improved policy coherence and credibility, leading to more sustainable public and external finances and a reduction in the risk of debt distress

The main factors that could, individually or collectively, lead to negative rating action/downgrade:

-Increased signs of a probable default event, for instance from severe external liquidity stress, potentially reflected in an ongoing erosion of foreign-exchange reserves and reduced capacity of the government to access external financing.