Fitch Ratings has downgraded the rating on SriLankan Airlines Limited's (SLA) US dollar-denominated government-guaranteed bonds to 'B+' from 'BB-'.

This follows the downgrade of Sri Lanka's Long-Term Foreign and Local-Currency Issuer Default Ratings to 'B+' with a Negative Outlook (see 'Fitch Downgrades Sri-Lanka to 'B+'; Outlook Negative', dated 29 February 2016). The national carrier's bonds are rated at the same level as SLA's parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state.

KEY RATING DRIVERS
The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities amid the country's vulnerability to a shift in investor sentiment. Furthermore, the sovereign's external liquidity position remains strained, reflecting pressure on foreign exchange reserves. The recent downgrade also reflects deteriorating public finances driven partly by consistently low general government revenues.

Government has identified tourism as a key economic growth driver in the medium term, and state support for SLA reflects its strategic importance as the leading airline to drive growth in the tourism sector. Tourist arrivals to Sri Lanka rose to 1.8 million in 2015 from 1.0 million in 2012.

The state held 99.5% of SLA through direct and indirect holdings at end-2015.

RATING SENSITIVITIES
Developments that may, individually or collectively, lead to negative rating action would include a downgrade of the Sri Lankan sovereign. Conversely, positive rating action could follow an upgrade of the sovereign.