• SriLankan Airlines management to appoint a consultant to engage with bondholders
• Bondholders refuse to restructure $ 175 m bonds; SriLankan Airlines denies knowledge
• Fitch Ratings will no longer provide ratings or analytical coverage for airline

Amidst the uncertainty faced by the State-owned National Carrier, SriLankan Airlines, The Sunday Morning reliably learns that its management is currently attempting to appoint a consultant to engage with its bondholders.

This effort comes against the backdrop of Fitch Ratings affirming the rating on SriLankan Airlines Ltd.’s $ 175 million Government-guaranteed 7% unsecured bonds due 25 June at ‘C’ and subsequently withdrawing the rating. 

These bonds are backed by a Deed of Guarantee executed by the Government of Sri Lanka, ensuring they constitute unsubordinated and unsecured obligations with the full faith and credit of the guarantor pledged for the punctual payment of principal and interest.

However, as of the current status, it is alleged that the bonds have defaulted with missed interest payments, and the guarantor has instituted a general moratorium on its debts. Efforts to amend the bonds’ terms through an extraordinary resolution were unsuccessful due to insufficient attendance at the convened meeting, resulting in no quorum.

Last week’s rating on the bonds was driven by the unconditional and irrevocable guarantee of the Government of Sri Lanka (Long-Term Foreign-Currency Issuer Default Rating [IDR]: ‘RD’). Fitch has chosen to withdraw the rating for commercial reasons. Therefore, it will no longer provide ratings or analytical coverage for SriLankan Airlines.

The US Dollar bonds are guaranteed by the Sri Lankan sovereign, and as such, SriLankan Airlines had halted payments on the bonds upon the Government’s announcement of a debt moratorium on 12 April 2022, affecting several categories of sovereign- and State-owned entities’ external debt. 

Ongoing process for a solution

When contacted by The Sunday Morning, SriLankan Airlines Chairman Ashok Pathirage said: “We are trying to appoint a consultant to engage with them. There is a process; we will engage with them and then we will find a solution. We are working alongside the Treasury.”

Furthermore, The Sunday Morning reliably learns that thus far, holders of the $ 175 million bond have rebuffed attempts to restructure the bond, although Pathirage denied knowledge of such an incident.

According to Fitch Ratings, SriLankan did not pay the bond’s principal and interest due 25 June and is currently within the 30-day grace period. In addition, the airline’s previous defaults on the bond’s coupon payments due 25 December 2023, 25 June 2023, and 25 December 2022 are continuing, with grace periods having expired.

Another event of default was triggered due to the 12 April 2022 announcement by the Government of a debt moratorium on several categories of sovereign and public-sector entities’ external debt, as well as the ensuing non-payment of interest on the Government’s external debt.

SriLankan’s bonds are rated ‘C,’ factoring in Fitch’s view of average- to below-average recovery prospects following a default, in line with the agency’s Corporate Recovery Ratings and Instrument Ratings Criteria, and Country-Specific Treatment of Recovery Ratings Criteria. Bonds of issuers very close to default show little distinction between ‘RR4’ and ‘RR6’ recoveries; therefore, Fitch has not assigned a Recovery Rating to the bond.

SriLankan finances 

However, in the latest SriLankan Airlines Annual Report, the group has revealed a notable operational profit of Rs. 43.4 billion for the 2022/’23 fiscal year, indicating a significant improvement compared to the previous year’s surplus of Rs. 1.7 billion. However, despite this progress, the airline has reported a substantial net loss of Rs. 71.3 billion. This loss was mainly due to an exchange loss of Rs. 63.1 billion and finance costs totalling Rs. 51.5 billion.

During the reporting period, SriLankan Airlines had experienced growth in both passenger and cargo revenue. Passenger revenue increased by 276%, largely driven by a 137% rise in passenger numbers. Additionally, cargo and other revenue had experienced a respectable 35% increase compared to the previous year.

However, total expenditure had surged by 48% compared to the previous fiscal year, primarily due to increased operational activities and the negative impact of the depreciating Sri Lankan Rupee against the US Dollar.

As further highlighted, the airline sector had recorded net losses of $ 6.9 billion, an improvement compared to the $ 9.7 billion loss projected in the International Air Transport Association’s (IATA) June outlook. This marks progress from the significant losses of $ 42 billion and $ 137.7 billion incurred in 2021 and 2020, respectively.  

Attracting investment 

In April, SriLankan Airlines received Requests for Qualification (RFQs) from AirAsia Consulting Sdn. Bhd., Dharshaan Elite Investment Holding Ltd., Fits Aviation Ltd., Sherisha Technologies Ltd., Treasure Republic Guardians Ltd., and Hayleys PLC.

Despite the challenge of attracting investors due to the airline’s debt burden, the Government decided to transfer $ 310 million in locally guaranteed loans to direct Government responsibility. Additionally, to support ongoing cash flow issues in the first four months of 2024, the Government injected a Rs. 5 billion equity contribution into the National Carrier.

In a recent media briefing, Ports, Shipping, and Aviation Minister Nimal Siripala de Silva said that SriLankan Airlines had seen little global interest from potential buyers. He noted that despite six individuals showing interest, none had met the criteria for suitability. De Silva underscored that even Sri Lankan entrepreneurs would need to prove their capabilities to be considered.

The Minister highlighted that the Government’s current approach prioritised restructuring over selling the airline outright. Speaking at the Presidential Media Centre, he clarified that only up to 49% of the airline’s shares could be transferred to another entity.

The Cabinet of Ministers at its meeting held on 9 July decided to terminate the current bidding process with respect to the divestiture of SriLankan Airlines, the State-Owned Enterprise Restructuring Unit (SOERU) said in a statement. It stated that the Government would now follow an alternate strategy, to be decided on shortly, to divest the airline based on a framework approved by the Cabinet.

Meanwhile, commenting on the airline’s future, Sri Lanka Nidahas Sevaka Sangamaya (SLNSS)  – Airline Branch President Janaka Wijayapathirathna said that the airline was currently under the oversight of the SOERU. He noted that none of the bidders had met the Government’s requirement of having at least 20 aircraft, indicating a lack of suitable candidates to take over SriLankan Airlines. 

However, Wijayapathirathna pointed to unconfirmed plans by a consortium of leading local companies to potentially acquire the airline, which the Government was encouraging. He emphasised that the Government could only offer up to 49% ownership.

When contacted, Ports, Shipping, and Aviation Ministry Secretary K.D.S. Ruwanchandra clarified that SriLankan’s affairs were managed by the SOERU, with no ministry interference in the process.

However, attempts to reach SOERU Head Suresh Shah were unsuccessful.