Fitch Ratings has assigned Aitken Spence Hotel Holdings PLC (ASHH) a National Long-Term Rating of ‘AA+(lka)’ with a stable outlook, reflecting strong support from its parent company, Aitken Spence PLC (ASP). This rating is indicative of ASP’s substantial operational and strategic incentives to support ASHH, despite low legal incentives, as per Fitch’s Parent and Subsidiary Linkage (PSL) Rating Criteria. ASHH’s standalone credit profile is assessed at ‘aa-(lka)’, bolstered by robust cash flow from its hotel portfolio, low leverage, and ample funding access, though it faces challenges due to exposure to the Maldivian economic environment.

Fitch has also assigned a ‘AA(lka)’ National Long-Term Rating to ASHH’s proposed senior unsecured debentures of up to LKR5 billion. These debentures are rated one notch below the issuer rating due to significant subordination to secured bank debt, which forms the majority of ASHH’s debt structure. The proceeds from these debentures are intended for settling existing bank debt, payables to ASP, and capital expenditure.

Key Rating Drivers

Parent’s High Strategic Incentives: ASP’s strategic support for ASHH is rated ‘High’, as ASHH contributes approximately 65% of ASP’s EBITDA and over 50% of the group’s assets. It is projected that ASHH’s EBITDA will grow at a CAGR of about 10% from FY26 to FY29, surpassing the growth of most of ASP’s other businesses. This growth is attributed to increased capital expenditures for hotel refurbishments and product repositioning, anticipated to enhance room rates and profit margins.

High Operational, Low Legal Incentives: ASP’s operational incentives to support ASHH are considered ‘High’, due to significant board and management overlap and shared branding. ASHH’s services are integrated with ASP’s destination management business, although ASP also engages with external suppliers. Legal incentives are rated ‘Low’, with debt guaranteed by ASP expected to decrease over time. ASP provides liquidity support within the group, including advances of LKR2.7 billion to ASHH by FYE25.

Ultimate Parent Support: ASP’s credit profile benefits from support by its 51% parent, Melstacorp PLC (AAA(lka)/Stable), which holds ‘Medium’ strategic incentives to support ASP. Operational and legal incentives are ‘Low’. ASP is anticipated to contribute 25%-30% of Melstacorp’s EBITDA over the medium term, offering higher growth than Melstacorp’s core beverage business. Support is expected to flow to ASHH from Melstacorp through ASP, given ASHH’s significant contribution to ASP’s credit profile.

Hotel Operations Drive Cash Flow: ASHH’s hotel operations are pivotal to the credit profiles of both ASHH and ASP, accounting for about 65% of ASP’s EBITDA. ASHH owns, operates, and manages properties with over 2,600 rooms, primarily in the Maldives and Sri Lanka. Tourist arrivals in the Maldives are expected to increase by mid-single digits in 2025, following a 9% growth in 2024. ASHH’s EBITDA margins are forecasted to remain steady at an average of 25% over FY26-FY29, supported by increased investments.

Cash Flow-Debt Mismatch: ASHH’s credit profile is challenged by its exposure to the fragile Maldivian economy, where a default event is considered probable within the rating horizon. The majority of ASHH’s EBITDA is generated from Maldivian hotels, while most borrowings are with Sri Lankan banks, exposing ASHH to currency regulation risks in the Maldives.

Maldivian Currency Regulations: The Maldives Monetary Authority in 2024 enforced the mandatory conversion of 20% of foreign currency sales to local currency, with exemptions for businesses with offshore debt servicing requirements. ASP’s strong access to Sri Lankan banks allows ASHH to manage term loan repayments effectively, mitigating liquidity risk.

Modest Leverage Despite High Capex: ASHH is expected to maintain a healthy financial profile despite increased capital expenditures. Fitch forecasts EBITDAR net leverage, including lease liabilities, at 2.5x by FYE26 and 2.9x by FYE27. Capital expenditures are projected to rise to 11% of revenue in FY26 and 13% in FY27, funded through a mix of new debt, operating cash flow, and accumulated cash reserves. EBITDAR fixed-charge cover is expected to remain around 3.0x.

Peer Analysis

ASHH’s credit profile is supported by its parent, ASP, and ultimate parent, Melstacorp. In comparison, DSI Samson Group (Private) Limited (AA(lka)/Stable) has a stronger demand profile due to its integrated supply chain. Singer (Sri Lanka) PLC (AA-(lka)/Stable) shares the same credit profile level as ASHH, with its core consumer electronics business benefiting from strong brand presence and distribution network. Sierra Cables PLC (A+(lka)/Stable) is rated one notch below ASHH, facing cyclical demand challenges but benefitting from local manufacturing demand during economic crises.

Fitch’s Key Rating-Case Assumptions

• Revenue growth of 6% in FY26 and 4% in FY27.
• EBITDA margin to remain stable around 25% in FY26, declining to 23% in FY27 due to temporary hotel closures.
• Capital expenditures to increase to 12% of annual revenue in FY26-FY27, with no ordinary dividends.

RATING SENSITIVITIES

Factors for Negative Rating Action/Downgrade:

• Weakening of ASP’s or Melstacorp’s support incentives.
• Sustained increase in ASHH’s EBITDAR net leverage above 3.5x.
• Sustained weakening in ASHH’s EBITDAR fixed-charge cover below 2.5x.
• Weakening of ASHH’s liquidity due to increased risk in cash flow repatriation from the Maldives.

Factors for Positive Rating Action/Upgrade:

• An upgrade is not anticipated in the medium term, due to ASHH’s exposure to Maldivian currency regulations and sovereign risk.

Liquidity and Debt Structure

ASP had a cash balance of approximately LKR43 billion as of FYE25, with LKR10 billion at ASHH and another LKR10 billion at the holding company level. This cash balance, along with forecasted free cash flow, supports liquidity. ASP’s strong banking relationships aid in managing term-loan repayments and rolling over short-term debt. ASHH is responsible for a significant portion of these financial commitments.

Issuer Profile

ASHH owns and manages hotel properties in Sri Lanka, the Maldives, India, and Oman, with a portfolio comprising over 2,600 rooms across 15 owned and four managed properties as of FY25.