(The following statement was released by the rating agency)
Nov 22 – Fitch Ratings has affirmed Bahrain-based Bahrain Telecommunications Company’s
(Batelco) Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-‘. The
Outlook on the IDR is Stable.
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.
Batelco’s 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.
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 recently expressed interest in Cable Wireless
Communications’ Monaco and Islands business division but discussions are still
in the early stages. In the event of any acquisitions, 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.
Fitch also assumes that capital commitment by the State of Bahrain may be
forthcoming for large-scale acquisitions, if needed.
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 a double digit decline in the company’s domestic revenue and EBITDA
in 9M12 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.
WHAT COULD TRIGGER A RATING ACTION?
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.