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Fitch Revises Batelco's Outlook to Stable; Affirms at 'BBB-'
May 14, 2015 / 2:02 PM / 3 years ago

Fitch Revises Batelco's Outlook to Stable; Affirms at 'BBB-'

(The following statement was released by the rating agency) LONDON, May 14 (Fitch) Fitch Ratings has revised the Outlook on Bahrain Telecommunications Company's (Batelco) Long-term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BBB-'. Fitch has also affirmed the unsecured rating of Batelco International Finance No. 1 Limited at 'BBB-'. The revision of the Outlook to Stable is driven by a significantly improved telecoms regulatory environment in Bahrain, which should allow Batelco to compete more effectively in its domestic market. The rating is notched up a level from the company's 'BB+' standalone rating for government support, in case of need. The standalone profile reflects the risk of international operations in higher-risk countries such as Jordan. KEY RATING DRIVERS Stable Rating Profile Although Batelco's financial profile remains strong and the domestic operating environment is improving, the current standalone rating level takes into account the political and economic risk of the countries its international operations are in. Batelco's ratings may not necessarily be impacted if Bahrain's sovereign rating (BBB/Negative) is downgraded, unless the sovereign rating becomes non-investment grade. Domestic Market Still Key The domestic market remains core to Batelco's earnings although its share of EBITDA fell to approx. 46% in 2014 from 60% in 2012. The acquisition of operations in the Maldives, the Channel Islands and the South Atlantic has somewhat improved the risk profile of Batelco's international portfolio. However, 25% of the group's EBITDA in 2014 still came from Jordan, a higher-risk country. Improved Regulatory Environment The regulatory environment in Bahrain has significantly improved for Batelco over the past 12 months. In March 2014, the Bahraini telecoms regulator said that mass-market broadband services were competitive and has removed regulatory obligations which previously applied to Batelco's mass-market fixed broadband services, resulting in the deregulation of approximately 90% of broadband services in Bahrain. The subsequent removal of bundling and price restrictions has significantly improved Batelco's ability to react and compete in the market. Discussion over the National Broadband Network is on-going. However, Batelco has begun a roll-out of fibre network and has managed to grow fixed-line market share without significant regulatory intervention. Competitive Domestic Mobile Market Fitch believes competition in the Bahraini mobile market is stabilising as pricing becomes more rational and expects that Batelco will be able to maintain or grow market share, albeit with some continued pressure on average revenue per user (ARPU). The competitive environment deteriorated following Viva's entry in the mobile market in 2010, which resulted in significant market share losses for Batelco. Price competition intensified significantly over 2011-2012, which placed significant pressure on Batelco's revenue and churn rates. Financial Flexibility Remains Strong Fitch's views Batelco's financial profile as strong, underpinned by our expectation of a conservative leverage profile, strong cash flow generation and a sound liquidity profile over the medium term. Fitch projects Batelco's net debt/EBITDA ratio to increase to 0.6x in 2015 (2014: 0.2x) due to spectrum payments but remain below 0.5x in 2016 and 2017 on FCF generation and a conservative shareholder remuneration policy. Government Ownership and Support Batelco is 78% directly and indirectly owned by the Government of Bahrain. The Bahraini Government is invested in Batelco via Bahrain Mumtalakat Holding Company (37%, BBB/Negative), Amber Holding (20%) and the Social Insurance Organization (SIO; 21%). Bahrain-based diversified investment holding company, Mumtalakat is 100% owned by the Bahrain government and is the government's investment arm. Through these entities, the Bahraini government exerts strong control over Batelco, and is represented in six out of the 10 directors, with three being from Mumtalakat (including the Chairman), one from SIO and two from Amber Holding. KEY ASSUMPTIONS - Revenue to stabilise in 2015, and to grow 3% p.a. in 2016 and 2017; - Overall revenue market share in key Bahraini market to increase with improved regulatory environment; - EBITDA margin to decline to 35% in 2015 before increasing gradually to 36.5% by 2018; - Capex (inc. spectrum) to increase to 35% of revenue in 2015, driven by spectrum payments before reducing to 15%-20% in 2016-17; - Annual dividend payments of approximately 95% of net income; and - No material M&A. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating action include: - Pressure on free cash flow 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 funds from operations (FFO) net leverage above 3.5x (0.7x at end-2014) 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 becoming non-investment grade. Batelco as a state-owned entity is highly unlikely to be rated higher than the sovereign. Positive: Future developments that could lead to positive rating action include: - A significant improvement in the operating and financial profile of its core domestic business and at other key subsidiaries - An upgrade of the sovereign rating in conjunction with Batelco receiving formal support from the Kingdom of Bahrain. CONTACTS Principal Analyst James Hollamby Analyst +44 20 3530 1656 Supervisory Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Athos Larkou, London, Tel: +44 203 530 1549, Email: Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at 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. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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