June 15, 2017 / 3:45 PM / 5 months ago

Fitch Revises Batelco's Outlook to Negative; Affirms IDR 'BB+'

(The following statement was released by the rating agency) LONDON, June 15 (Fitch) Fitch Ratings has revised Bahrain Telecommunications Company's (Batelco) Outlook to Negative from Stable while affirming the Long-term Issuer Default Rating (IDR) at 'BB+'. Fitch has also affirmed the unsecured rating of Batelco International Finance No. 1 Limited at 'BB+'. This rating action follows Fitch's revision of the Outlook on the sovereign rating of Bahrain to Negative from Stable and the affirmation of its Long-Term Foreign and Local Currency IDRs at 'BB+' on 12 June 2017 (see 'Fitch Revises Bahrain's Outlook to Negative, Affirms IDR 'BB+' at www.fitchratings.com). KEY RATING DRIVERS Linkage to the Sovereign: Batelco's current rating does not benefit from any uplift for government support, as the company's 'BB+' standalone rating is at the same level as the sovereign. Batelco as a state-owned entity is highly unlikely to be rated higher than the sovereign, therefore any negative rating action for the sovereign would impact Batelco's rating negatively. Batelco could benefit from a one-notch uplift from sovereign support if the sovereign rating is higher than Batelco's standalone rating. An upgrade of the sovereign rating could result in an upgrade for Batelco, provided there is continued support from the government of Bahrain. Batelco is 78% directly and indirectly owned by the government of Bahrain, and is represented by six out of 10 directors on Batelco's board. Leverage Remains Low: Despite group revenue and EBITDA coming under pressure in 2016 and 1Q17, Fitch's views Batelco's financial profile as satisfactory, underpinned by our expectation of a conservative leverage profile (funds from operations (FFO) adjusted net leverage around 1.5x-2.0x over the next three years), good pre-dividend cash flow generation and a sound liquidity profile over the medium term. Domestic Market Key: Batelco is facing intense competition in its domestic market (which accounted for 48% of the group's 2016 EBITDA), especially in mobile. Pursuing a convergence strategy, focused on a high-quality fixed and mobile infrastructure should allow Batelco to retain its strong market share in the mid-to-high value consumer segment as well as in the business segment. International Diversification: Batelco's largest international operations are in the Maldives, Jordan and the Channel Islands. The Maldives and the Channels Islands are performing in line with Fitch's expectations and underlying EBITDA should remain stable over the next three years. Jordan (around 20% of Batelco's consolidated revenue) is a greater challenge due to its weak macroeconomic trends and higher execution risks as Batelco invests in network expansion. Overall, Batelco has the financial flexibility to support its investment in Jordan, which is reflected in the ratings. DERIVATION SUMMARY Batelco's standalone rating is 'BB+', reflecting the company's improving domestic position, low leverage as well as risks in its international operations. We do not envisage Batelco being rated above the sovereign, especially given the government's significant shareholding in the company. KEY ASSUMPTIONS Our assumptions within the rating case for the issuer include: -Revenue growth of 1%-1.5% per annum in 2017-2019; -EBITDA margin largely stable at 36%-37% in 2017-2019; -Capex (excluding spectrum) averaging around 15%-20% of revenue in 2017-2019; -Annual dividend payments rising in line with EBITDA. RATING SENSITIVITIES Batelco Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Pressure on free cash flow (FCF) driven by EBITDA margin erosion, consistently higher capex and shareholder distributions, or significant underperformance in the core domestic market and at other key subsidiaries. -Debt-funded acquisitions leading to an increase in FFO net leverage above 3.5x (1.6x at end-2016) with failure to deleverage below such threshold within the next 18 months. -A weakening in the linkage with the sovereign, which would be a negative credit factor, as would any possibility of the sovereign rating being downgraded from 'BB+'. Batelco as a state-owned entity is highly unlikely to be rated higher than the sovereign. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - An upgrade of the sovereign rating, or a change of Outlook to Positive, with continued support from the government of Bahrain, without a weakening in the linkage with the sovereign. Bahrain sovereign Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Failure to shrink the fiscal deficit and set out a clear path towards stabilising the government debt-to-GDP ratio. - Severe deterioration of the domestic security environment. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - A narrowing of the budget deficit consistent with a decline of the government debt-to-GDP ratio in the medium term. - A broadly accepted political solution to domestic political tensions. Contact: Principal Analyst Samer Haydar Associate Director +971 4424 1200 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Tajesh Tailor Senior Director +44 20 3530 1726 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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