DUBAI: Standard & Poor’s Ratings Services has affirmed its BB+ long-term corporate credit rating on Bahrain-based telecommunications incumbent Bahrain Telecommunications Co. (Batelco). The outlook remains stable.
At the same time, S&P affirmed its BB+ issue ratings on the senior unsecured notes due 2020 that were issued by Batelco International Finance No 1.
“The rating affirmation follows Batelco’s improving operating performance in the nine months through Sept. 30, 2014, and credit metrics that are stronger than we had previously forecast. However, we believe that the company’s leverage could increase because of either mergers and acquisitions (M&A) or shareholder distributions,” S&P in a statement said.
“Constraining Batelco’s business risk profile is its fairly small scale on a global basis, the evolving competitive and regulatory landscape for telecoms in Bahrain, and its exposure to country risk. Offsetting these weaknesses is its strong competitive position in Bahrain’s fixed-line and mobile telephony markets and improving operating performance and profitability. The company dominates Bahrain’s fixed-line market. However, we anticipate that competition in fixed-line broadband will increase,” it added.
“Batelco’s financial risk profile is supported by its low debt leverage and large cash balance. However, the company has a net debt to EBITDA target of 2.5x-3.0x. Therefore, we assess Batelco’s financial policy as “negative,” reflecting our view that acquisitions or dividends could drive leverage above our base-case scenario expectations.”
“We also believe that Batelco’s majority shareholder, the Kingdom of Bahrain, has a weak fiscal position, as reflected in our recent revision of our outlook on the sovereign to negative, which supports our view that a continued high dividend payout ratio is likely,” S&P in a statement said.
“In accordance with our criteria for government-related entities (GREs), we view the likelihood of timely and extraordinary financial support for Batelco from the government of the Kingdom of Bahrain as “moderately high.”
“The stable outlook reflects our view that Batelco will maintain its operating performance and that profitability will stabilize at the current levels. We forecast that Batelco will maintain an adjusted consolidated EBITDA margin of above 35%. We assume that the company’s leverage will remain less than 3.0x (0.6x for the 12 months to Sept. 30, 2014). We would assess any sizable acquisition not only for its effect on leverage, but also for any effect it may have on our view of Batelco’s business risk profile as “fair.”
“We could lower the ratings if Batelco’s leverage exceeded 3x, or if it had leverage above 2x in combination with weak or negative free operating cash generation. This could result from M&A, weakening in operating performance (notably in the domestic market), or higher dividends.
“Rating upside will be considered in the context of the new management’s strategic plan, which we understand will be unveiled in the coming two months, as well as the operating performance of the company. Nevertheless, fiscal pressure on Batelco’s majority shareholder, the Kingdom of Bahrain (BBB/Negative/A-2), is a limiting factor to upside potential for the rating,” S&P added.