Standard & Poor’s Ratings Services has lowered its long-term corporate credit ratings on Orascom Telecom Holdings and Orascom Telecom Finance to ‘B’ from ‘B+’ following weaker growth expectations from its Pakistan- and Bangladesh-based operations.
The outlook is stable. At the same time, Standard & Poor’s lowered its issue rating on the $750 million senior unsecured notes issued by Orascom Telecom Finance to ‘CCC+’ from ‘B-‘.
The downgrade primarily reflects our expectation of slower EBITDA growth from two of Orascom Telecom’s important future growth engines: its Pakistan-based 100%-owned subsidiary Pakistan Mobile Communications (Mobilink), which is the market leader in the Pakistan mobile telecoms market, and Sheba Telecom (Banglalink), the second-largest player of six in the fast-growing Bangladeshi mobile market.
“This slower EBITDA growth will likely result in lower-than-expected positive free operating cash flow (FOCF) from these markets in the originally envisaged timeframe,” said Standard & Poor’s credit analyst Michael O’Brien.
“The downgrade also reflects concerns that a weakening economic environment in the Islamic Republic of Pakistan (foreign currency CCC/Developing/C; local currency CCC+/Developing/C) may result in the need for Orascom Telecom to provide higher-than-expected support to Mobilink over the next 12 to 18 months to ensure that Mobilink can service debt coming due and to ensure compliance with financial covenants,” said Mr. O’Brien.
Mobilink is Orascom Telecom’s second-largest operation, providing substantial cash flow on the basis of upstreamed management fees and representing a significant 21.4% share of the group’s consolidated EBITDA in the first nine months of 2008, down from 25% in the first half of 2008.
Although immediate liquidity needs at Mobilink are deemed to be covered and the company has flexibility to reduce capital expenditures, any increase in exposure to potential funding risks at Mobilink will burden Orascom Telecom, given its strong incentive and need to support its 100%-owned subsidiary in financial management and covenant compliance.
The ratings are supported by Orascom Telecom’s growth in Algeria, Tunisia, and Egypt, which generate the bulk of cash flow for the group. In addition, we acknowledge the repayment of a portion of debt at the Weather level (related to the collateralized payment-in-kind loan at Weather Capital SP1 S.A.) following a $554 million preferred equity contribution by Weather’s shareholders, which reduces the need for Orascom Telecom to address this instrument in the future.
We expect that Orascom Telecom will continue to develop its business and execute its strategy toward achieving sustainable positive FOCF in the future, while at all times providing liquidity to its diverse operations to fund capital expenditures or acquisitions and to meet ongoing debt repayments around the company. The outlook also assumes that dividend payments, share repurchases, or new acquisitions will not unduly burden Orascom Telecom or meaningfully increase the leverage of the overall group from current levels, including debt at Weather Capital.
Achievement of sustainable positive FOCF on a group basis could provide ratings upside, accompanied by better visibility on future growth of the businesses in Pakistan and Bangladesh. Ratings upside may not be immediate, however, given the strategic options open to Orascom Telecom to grow its business. Any significant increase in debt not accompanied by sustained positive FOCF, or an impairment of liquidity, could put pressure on the ratings.
Via Cellular News