Financial Risk Manager: Mobile Communications Rating

Mobile Communications Rating
Thursday, May 21, 2009

Mobilink faces funding risks, economic uncertainty, weak cash flow protection, intense competition. We have raised the corporate credit rating on Mobilink to 'CCC+' from 'SD' and the issue rating on its senior notes to 'CCC+' from 'D'. Developing outlook reflects the outlook on Pakistan's macroeconomic and operating environment.

Standard & Poor's Ratings Services today raised its long-term corporate credit rating on Pakistan-based wireless service provider Pakistan Mobile Communications Ltd. (Mobilink) to 'CCC+' from 'SD' (selective default). The outlook is developing. At the same time, we raised our issue rating on Mobilink's US$112.2 million senior unsecured notes due 2013 to 'CCC+' from 'D'.

This upgrade came after Standard & Poor's lowered the corporate credit rating to 'SD' on May 12, 2009, following the announcement by Mobilink of completion of the tender offer to repurchase US$137.8 million of initial notes for US$100.6 million in cash. Standard & Poor's, based on its criteria, had viewed the tender offer by Mobilink as a distressed exchange.

The rating on Mobilink reflects the company's high exposure to funding risks and economic uncertainty, weak cash flow protection measures, and highly intense domestic industry competition. These risks are partly offset by strategic benefits from its parent, Orascom Telecom Holdings S.A.E. (B/Stable/--), and the company's leading but weakening market position in the country.

"In our view, Mobilink is significantly exposed to the weak macroeconomic environment, external liquidity position and security situation in Pakistan (CCC+/Developing/C)," said Standard & Poor's credit analyst Yasmin Wirjawan. "This could result in funding challenges for Mobilink, which has historically relied significantly on local financing for growth and investment in the domestic wireless market. Also, most of the company's debt comprises local borrowings." The developing outlook reflects uncertainty regarding Pakistan macroeconomic or operating environment, which could affect the company's funding access and growth opportunities in the local wireless market.

"Mobilink's financial profile is weak, in our opinion, with aggressive cash flow protection measures," Ms. Wirjawan said. Adjusted debt (excluding fair value of cross currency swaps) to EBITDA deteriorated to 4.0x as of Dec. 31, 2008, from 3.2x as of Dec. 31, 2007, led by higher debt due to aggressive capital expenditure and depreciation of the local currency.

"However, we expect the company to improve its financial metrics to remain compliant with its financial covenants, which are currently under pressure. The improvement is expected through significant reduction in capital expenditure, support from Orascom through deferral of management fee, and recent repurchase of notes," Ms. Wirjawan added. "Nevertheless, we view the company's repurchase of notes as an aggressive financial management strategy."

Pakistan's cellular market is intensely competitive, resulting in lower subscriber numbers and market share for Mobilink. Its market share is currently 31% (according to the regulator) after slipping consistently from 64% at year-end 2004. The decline is partly attributed to the change of subscriber accounting policy. Nevertheless, Mobilink continues to be the leader in Pakistan's wireless market.

We believe parent Orascom would continue to provide support to Mobilink, if required, considering: (1) the cross-default clause at the parent company in the event of a covenant breach of material subsidiaries, including Mobilink; and (2) Mobilink is the second-largest operation of Orascom and accounted for 20.6% of the consolidated EBITDA for 2008.

Labels: Economy and Business