TEXT - S&P affirms Bahrain Telecommunications ratings

Mon Dec 10, 2012 11:12am EST

(The following statement was released by the rating agency)
    
Overview
     -- Bahrain Telecommunications Co., a former incumbent fixed-line and 
leading mobile telecommunications operator in Bahrain, is acquiring a number 
of telecom assets from Cable & Wireless Communications in a two-step deal for 
a total consideration of $1 billion.
     -- We understand the deal will be funded with new debt, but expect 
post-transaction leverage to remain in line with our target for the current 
rating.
     -- We are therefore affirming our 'BBB-/A-3' ratings.
     -- The negative outlook mirrors that on the sovereign rating.

Rating Action
On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 
long-term and 'A-3' short-term foreign and local currency corporate credit 
ratings on Bahrain's largest telecommunications operator, Bahrain 
Telecommunications Co. (Batelco). The outlook is negative.

Rationale
The affirmation reflects our view that the acquisition of assets of about $1 
billion from Cable & Wireless Communications PLC will not negatively affect 
Batelco's credit quality. We understand that as a first step, Batelco will 
acquire operations in Les Maldives, Guernsey, Les Seychelles, and several 
other islands, as well as 25% of the company that owns 55% of Monaco Telecom 
for about $680 million to be closed in first-quarter 2013. Second, Batelco 
will also aim to increase its stake in Monaco Telecom to controlling, which 
could take a year to complete and would cost another $345 million. Although we 
see limited synergies for Batelco from the acquisition and acknowledge the 
risks of integration and management of island assets that are geographically 
spread, we do not expect our assessment of Batelco's business risk profile to 
change as a result of the transaction. We view the credit quality of the 
acquired assets at the level similar to that of Batelco's existing operations.

We also believe that the acquisition will remain commensurate with our current 
assessment of Batelco's financial risk profile. We forecast that even with 
100% debt financing post-transaction, leverage will remain at about 2x, 
commensurate with our expectations for the current rating. We also do not 
expect any weakening in Batelco's liquidity as we understand that the company 
has obtained commitment for financing the first phase of the transaction in 
the form of a bridge loan and has significant cash balances on hand to almost 
fully finance the second phase.

The ratings on Batelco are based on the company's stand-alone credit profile 
(SACP), which Standard & Poor's assesses at 'bb+', as well as on our opinion 
that there is a "high" likelihood that the government of the Kingdom of 
Bahrain (BBB/Negative/A-2) would provide timely and sufficient extraordinary 
support to Batelco, which we consider a government-related entity (GRE), in 
the event of financial distress. In turn, the SACP reflects our assessment of 
Batelco's business risk profile as "fair" and of the company's financial risk 
profile as "intermediate."

Batelco's business risk profile is constrained by its limited scale, which 
potentially exposes the company to risks of competition with larger and 
financially stronger peers in its home market, namely subsidiaries of Saudi 
Telecom and Zain. It is further constrained by the company's operating 
performance that is weakening largely because of competition, and its 
expansion into countries with high country risk. That said, Batelco's market 
position is currently strong in its home market, as the company remains a 
clear leader in the highly profitable post-paid mobile telephony market. 

Batelco's financial risk profile is primarily supported by its moderate debt 
leverage and its robust cash flow generation, which is consistent with an 
intermediate financial risk profile. These positives are partly offset by a 
payment of a high percentage of cash flow paid as dividends, which constraints 
financial flexibility.

Liquidity
Batelco's liquidity prior to the acquisition was adequate, reflecting its 
minimal debt and significant cash balances of Bahrain dinar (BHD) 87 million 
($231 million). 

Although we expect Batelco to use a significant part of its cash to finance 
the acquisition, we expect liquidity to remain adequate post-closure. The 
company has obtained commitment for bridge financing in the amount of $650 
million, which will be sufficient to fully finance the first step of the 
transaction that is planned to close in first-quarter 2013. We expect Batelco 
to proactively seek financing for the second phase of the transaction in 2013, 
as well as to refinance the bridge with long-term debt.

Outlook
The negative outlook mirrors the outlook on the sovereign rating. Accordingly, 
a downgrade of the Kingdom of Bahrain will trigger a one-notch downgrade of 
Batelco. 

In our base-case scenario we assume that Batelco will maintain its strong 
market position in Bahrain, and will avoid a further decline in profitability 
because of competitive pressures. We assume that revenue growth in Jordan will 
fully offset the revenue decline in Bahrain, resulting in flat revenue growth 
in 2013 (not including the acquired assets). We believe that in 2013 Batelco 
will continue implementing its cost-savings program, which should support the 
EBITDA margin in Bahrain at above 30%. We also assume that post-transaction 
leverage will remain commensurate with our target of Standard & 
Poor's-adjusted debt to EBITDA of below 3x.

A significant reduction in the state's shareholding in Batelco and consequent 
reappraisal of our GRE assessment could also lead to a one-notch downgrade. 

Accordingly, the outlook could be changed to stable in case of a similar 
rating action on the sovereign. 

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed

Bahrain Telecommunications Company
 Corporate Credit Rating                BBB-/Negative/A-3  

 (Caryn Trokie, New York Ratings Unit)