(The following statement was released by the rating agency)
-- 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
-- We are therefore affirming our 'BBB-/A-3' ratings.
-- The negative outlook mirrors that on the sovereign rating.
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.
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
Batelco's liquidity prior to the acquisition was adequate, reflecting its
minimal debt and significant cash balances of Bahrain dinar (BHD) 87 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.
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
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,
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Bahrain Telecommunications Company
Corporate Credit Rating BBB-/Negative/A-3
(Caryn Trokie, New York Ratings Unit)