Colombo Stock Market Emerging as a Funding Option for Hotels as Tourist Arrivals in Sri Lanka Hit Record Levels in 2010

04th May 2011, www.lankabusinessonline.com

Sri Lanka's hotels, enjoying a boom after the end of a war, can seek expansion funds from the stock market, with banks having difficult history of lending to the sector, a report said.

However, unlisted firms which form the bulk of the hotels, may face difficulties in using
the stock market, RAM Ratings (Lanka) said in a report on the island's hotel sector.

Tourist arrivals hit record levels in 2010 after the island's 30-year ethnic war ended in May 2009 but most hotels face funding constraints in upgrading and expanding to cater to growing demand, it said.

"Banks have been unwilling to lend to the industry because of its dismal performance during the civil war, coupled with the segment's acute susceptibility to adverse macroeconomic conditions and external shocks," the rating agency said.

Loans granted to the tourism sector by licensed commercial banks had almost doubled during the first half of 2010 from the previous year.

But their total exposure to the sector only came up to less than three percent or 30.54 billion rupees of the commercial banking system’s entire loan portfolio as of end-June 2010.

"This is also reflected in the relatively low gearing ratios of hotel operators," RAM Ratings said.

"Large, established hotel operators with their holding companies’ support may be in a position to obtain bank funding on favourable terms while the small and medium-sized establishments face difficulties."

The rating agency said the booming Colombo bourse, among Asia's best performing stock markets in the last two years, could be an alternative to bank borrowing.

"Raising capital via the stock market is now an attractive option given the buoyancy of the Colombo Stock Exchange (CSE) and the near-euphoria buoying the tourism sector," the report said.

"However, this is a viable option only for listed entities, which account for less than five percent of Sri Lanka’s hotels."

Smaller, unlisted hotels face their own problems in trying to raise capital through the stock market.

"We believe that entities may be reluctant to raise capital via initial public offerings due to their lack of procedural infrastructure and the requisite level of transparency required by the CSE’s listing criteria," RAM Ratings said.

With the slump in tourist arrivals during the war, the hotel sector had been operating under "extremely challenging conditions", the report said, noting that upgrading facilities and infrastructure to international standards had been neglected.

"Many Asian neighbours have progressed significantly in terms of the quality of their offerings relative to Sri Lanka’s.

"Unless there is substantial investment in the refurbishment/upgrading of hotel rooms, particularly for mid- and low-end properties, and amenities, the industry will not find it easy to capitalise on the opportunities arising from the country’s post-war development," RAM Ratings said.

Related Info :

• Sri Lanka Insurers Invest in Listed Firms Propelled by a Booming Stock Market and Falling Interest Rates on Fixed Income Securities

• Sri Lanka Needs to Develop Corporate Bond Market as Investors Eye Asian Instruments due to US Quantitative Easing

• Surplus Dollars Can be Channelled into Sri Lanka Corporate Bond Market