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April 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Bahrain Telecommunications Company B.S.C.'s (Batelco) prospective USD notes, to be issued by Batelco International Finance No1 Limited, an expected rating of 'BBB-(EXP)'. The final rating is contingent on receipt of final documents conforming to information already received. The notes are guaranteed by Batelco ('BBB-'/Stable).
The obligations of Batelco under its guarantee in respect of the notes will be direct, unconditional and unsecured obligations of Batelco and will rank pari passu and equally with all other unsecured obligations of Batelco. The terms and conditions of the documentation include a change of control clause, a negative pledge clause and a cross default provision. The change of control clause would be triggered if at any time the Government of Bahrain ceases to own, directly or indirectly, at least 50% of the issued share capital of Batelco. English law is applicable to the notes.
KEY RATING DRIVERS:
- Market Position
The rating reflects Batelco's leading position in the domestic market, its robust free cash flow (FCF) on a group level despite elevated competition and EBITDA margin pressure. Pre-dividend FCF generation is one of the strongest among peers in the Middle East, although the company is relatively small, with moderate international diversification compared to regional peers.
The Stable Outlook reflects the limited growth prospects in the domestic telecom market. Batelco faces elevated competition in the domestic mobile market, which resulted in declines in the company's domestic revenue and EBITDA in 2012 on a yoy basis. Fitch expects the company to retain its post-paid subscriber base and a return to rational competition in 2013 that has proven disruptive to all market participants. The main risk for the company is the domestic operation, as it is facing competition from a new entrant, Viva, operated by Saudi Telecom Company, which is able to compete aggressively on price.
- Rating alignment with sovereign
Batelco's Issuer Default Rating (IDR) reflects Fitch's assessment of the sovereign's creditworthiness, given its strong operational and strategic ties with Bahrain. Batelco is 78% directly and indirectly owned by the Government of Bahrain ('BBB'/Stable). Batelco is a flagship company and a strategic investment for the state as telecommunication is highlighted as a core industry. Fitch's approach and top-down notching methodology takes into account the assumed government support in line with Fitch's parent and subsidiary rating linkage methodology.
- M&A risk
The company's acquisition strategy is focused on mobile and broadband operations in growth markets - management is not interested in capital-intensive greenfield operations. Batelco has acquired Cable & Wireless Communications Monaco and Islands business divisions to be completed in two stages pending regulatory approvals for asset transfers. Stage 1 was substantially completed on 3 April 2013. Fitch would expect the leverage metric (net debt to EBITDA) to remain within the 2x rating guideline and would then anticipate gradual deleveraging.
Government involvement in such decisions (expansion outside Bahrain through acquisitions) indicates inherent government support at the current rating level. In line with the parent and subsidiary rating linkage methodology, Fitch expects ongoing capital commitment by the Kingdom of Bahrain should it be required in the future.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- An upgrade of the sovereign rating would be a positive credit factor due to strong linkage with the sovereign.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A downgrade of the sovereign would not impact Batelco's IDR negatively as a sovereign downgrade would equalise the sovereign and Batelco's standalone ratings
- Aggressive acquisitions that breach the company's maximum net debt to EBITDA level or the failure to deleverage to below 2x (net reported leverage) in the short term after such an acquisition would be negative.