Moody’s Investors Service has downgraded Pakistan Mobilink Communications (Mobilink) B1 local currency corporate family rating to B2; at the same time Mobilink’s B3 senior unsecured bond rating has been downgraded to Caa1; the outlook on both ratings is negative.
“The rating action has been prompted by the downgrade of Mobilink’s parent, Orascom Telecom Holdings (“Orascom” — rated B1/negative) due, in part, to concerns over its weak liquidity profile, and the evolving business risk within the group,” says Laura Acres, a Moody’s Vice President, adding “Concerns over Orascom’s liquidity and its ability to provide financial support have negative implications on Mobilink given the recent history of reliance on equity injections from Orascom to ensure covenant compliance under Mobilink’s loan agreements.”.
“However, on a stand-alone basis, Mobilink’s financial metrics are strongly positioned within the current B2 rating, reflecting the company’s established brand, leading market position and extensive network coverage as well as its moderate leverage and strong margins. The combined financial and operational profile of Mobilink is expected to remain strong for the current rating level, in the absence of any resumption of dividends or material re-leveraging of the company to fund capex, which at this time are not expected,” says Acres, also Moody’s Lead Analyst for Mobilink.
The outlook on Mobilink’s ratings is negative reflecting its weak liquidity profile and inability to meet financial covenants on a standalone basis. These risks are partially mitigated by the track record of cash injections in the past from Orascom to ensure that Mobilink is fully compliant with its covenants. In the absence of covenant amendments it is expected that such financial support, either in the form of equity injections or reduced management fees, from Orascom should continue, given the cross default and cross acceleration clauses that exist between the two entities.
Upward pressure on the rating is unlikely given the negative outlook and the degree of reliance on financial support from Orascom. However, the outlook could revert to stable should Mobilink deliver on its financial projections and develop a sustainable cushion under its bank loan covenants. Moody’s would also like for Mobilink to demonstrate an ability to become self funding, evidenced by improving free cash flows as well as the ability to cover its capex and interest, evidenced by (EBITDA-capex)/interest exceeding 1.5x. Moody’s would also like to see adjusted debt/EBITDA improve such that it returns to less than 3.0x.
Downward pressure on the ratings could emerge should Mobilink: a) experience a significant deterioration in market share such that it loses its market leadership status; b) resume the payment of dividends or management fees thereby reducing available retained cash flow, such that retained cash flow/adjusted debt falls below 10%; and c) is unable to access finances to fund ongoing growth or repay/refinance lines as and when they fall due. Moody’s would also be concerned if Mobilink did not delever in line with expectations such that adjusted debt/EBITDA increases above 4.0x.
Furthermore, given the reliance on financial support from the parent to aid covenant compliance, Moody’s would also be concerned about any further deterioration in Orascom’s credit profile, although any further downward rating action on Orascom would not automatically trigger a downgrade in Mobilink’s ratings.
The last rating action was on 17th April 2009 when Mobilink’s corporate family and senior unsecured bond rating were affirmed at B1 and B3 respectively, each with a negative outlook.
Mobilink is the largest mobile operator in Pakistan with more than 29.5 million customers and a subscriber market share of 30.8% as at June 2009 (source: PTA). Mobilink is indirectly 100%-owned by Orascom – itself rated B1/negative.
Via Cellular News