PHOTO
Fitch Ratings-Dubai/London-March 12: Fitch Ratings has downgraded Bahrain Telecommunications Company's (Batelco) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB+'. The Outlook is Stable. Fitch has also downgraded the unsecured rating of Batelco International Finance No. 1 Limited to 'BB-' from 'BB+'.
This rating action follows Fitch's downgrade on 1 March 2018 of Bahrain's Long-Term Foreign- and Local-Currency IDRs to 'BB-' from 'BB+'. The Outlook on these ratings is Stable (see "Fitch Downgrades Bahrain to 'BB-'; Outlook Stable" at
Batelco's 'BB-' IDR is based on its standalone rating of 'BB+', which reflects the company's leading domestic position in a competitive Bahraini market. The standalone rating also takes into account the political and economic risk of the countries in which Batelco has international operations. However, Batelco's rating is limited by Bahrain's 'BB-' sovereign rating as the Bahraini government owns 77% of the company and exerts strong control over it.
KEY RATING DRIVERS
Domestic Market Key: Bahrain is a key market for Batelco, accounting for around 40% of the group's EBITDA. Competition is intense, especially in mobile. However, Batelco's operating position in its domestic market is improving. Pursuing a convergence strategy, focused on a high-quality fixed and mobile infrastructure, should allow Batelco to retain its strong market shares in the mid- to high-value consumer segment and the business segment. Batelco's annual consolidated revenues grew for the first time in 2017 since 2009, while domestic revenues grew 3% y-oy in 2017.
Profitability should be helped by efficiency gains as Batelco increasingly integrates its fixed and mobile networks and IT infrastructure. Free cash flow (FCF) should improve in the coming years as domestic capex falls as Batelco completes the bulk of its fibre rollout and IT upgrades.
International Operations: Batelco's largest international operations are in the Maldives, Jordan and the Channel Islands. The Maldives business (of which Batelco owns 52%) generates healthy operating FCF, while reported revenue from the Channels Islands (and the Isle of Man) has stabilised after being hit by GBP weakness over the past two 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.
Increasing Leverage:Fitch views Batelco's financial profile as strong, underpinned by our expectation of a conservative leverage profile, and a sound liquidity profile over the medium term. However, leverage has been slowly increasing with a higher level of capex and increasing dividends. We expect Batelco's funds from operations (FFO) adjusted net leverage (as defined by Fitch) to increase from 1.3x at end-2017 to 1.9x by end-2018, assuming Batelco completes its announced 10% share buyback and maintains its capex profile. We expect FFO adjusted net leverage to stabilise at around 2.0x over the medium term, a level that is low for a 'BB-' rating.
Linkage to the Sovereign: Batelco's standalone rating (ie not factoring in its government ownership) of 'BB+' is higher than the Bahrain sovereign rating of 'BB-'. We do not envisage the company being rated higher than the sovereign as Batelco is a state-owned entity. Any changes to the sovereign rating would therefore likely be reflected in Batelco's rating.
Batelco is 77% directly and indirectly owned by the government of Bahrain. The Bahraini government is invested in Batelco via Bahrain Mumtalakat Holding Company (37%; BB+/Stable), Amber Holding (20%) and the Social Insurance Organisation (SIO; 20%). 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 by six of the 10 directors on the company's board: three from Mumtalakat (including the Chairman); one from SIO; and two from Amber Holding.
Batelco's rating is covered by Fitch's Government-Related Entity Criteria. If the Bahrain sovereign rating was higher than Batelco's standalone rating, Batelco would likely be rated one notch below the sovereign rating.
DERIVATION SUMMARY
Batelco's standalone rating is 'BB+', reflecting the company's improving domestic position, low leverage as well as risks to its international operations. We do not envisage Batelco being rated above the sovereign, especially given the government's significant shareholding in the company. Other telcos in the region such as Etisalat ('A+'/RWN) and Ooredoo ('A'/RWN) are much larger and can rely on domestic markets that are less competitive.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue growth of around 1.5% per annum till 2020
- EBITDA margin slightly over 34% till 2020
- Capex (ex spectrum) of around 19% in 2018, declining to below 15% in 2020
- Stable dividend per share till 2020
- Buyback of up to 10% of outstanding shares to take place during 2018, depending on shares availability
RATING SENSITIVITIES
Batelco
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Pressure on 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
- FFO net leverage remaining above 4.5x (1.3x at end-2017) with failure to deleverage below such a threshold within the next 18 months
- 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.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- An upgrade of the sovereign rating, or a change of the Outlook to Positive, with continued support from the government of Bahrain, without a weakening in the linkage with the sovereign
Bahrain Sovereign
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A narrowing of the budget deficit consistent with a decline in the government debt/GDP ratio over the medium term
- A broadly accepted political solution to domestic political tensions
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/GDP ratio
- Severe deterioration of the domestic security environment
LIQUIDITY
Strong Liquidity:Batelco has BHD158.7 million of cash on its balance sheet at end-2017, along with BHD62.4 million of short-term deposits treated as restricted cash. Batelco has no immediate material debt maturities, with the company's bonds maturing in 2020 and the long-term loan facility due 2023.
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
Summary of Financial Statement Adjustments
Cash and cash equivalents excludes short-term deposits with maturities exceeding three months and unclaimed dividends (BD62m at end 2017), and includes the value of liquid government bonds (BD35m at end 2017).
Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com.
Additional information is available on
Applicable Criteria
Corporate Rating Criteria (pub. 07 Aug 2017)
Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016)
Exposure Draft: Corporate Rating Criteria (pub. 14 Dec 2017)
Exposure Draft: Country-Specific Treatment of Recovery Ratings Criteria (pub. 14 Feb 2018)
Government-Related Entities Rating Criteria (pub. 07 Feb 2018)
Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 21 Dec 2017)
Parent and Subsidiary Rating Linkage (pub. 15 Feb 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
Copyright 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided as is without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSROs credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see
