Moody’s Investors Service has revised to positive from stable its outlook on the B2 corporate family rating of Pakistan Mobile Communications Limited (Mobilink). At the same time, Moody’s has also affirmed Mobilink’s B2 corporate family rating.
The rating action reflects the outlook change for Pakistan’s Caa1 sovereign rating and Mobilink’s stronger fundamental credit quality when compared to the sovereign. On 25 March, Moody’s affirmed Pakistan’s Caa1 foreign currency government bond rating and Caa1 issuer and senior unsecured ratings. Moody’s also revised the outlook on Pakistan’s sovereign ratings to positive from stable.
“Despite its stronger fundamental credit quality, Mobilink’s B2 corporate family rating is constrained by the two notch differential between its own rating and the sovereign’s Caa1 rating,” says Gloria Tsuen, Moody’s Vice President and Senior Analyst. “The rating outlook has also been changed to positive, in line with that of Pakistan’s sovereign ratings,” adds Tsuen.
As Mobilink is predominantly a domestic entity, with substantially all of its revenues derived from, and assets based in Pakistan, Moody’s believes that the company’s fundamental creditworthiness needs to closely reflect the potential risks that it shares with the sovereign.
Thus, non-financial corporates are not usually rated more than two notches above the sovereign “We continue to take into account Mobilink’s strong fundamental credit quality by keeping its B2 corporate family rating two notches above the sovereign rating. We expect it to maintain its leading market position in the mobile market in Pakistan and preserve strong financial metrics for its rating level,” says Tsuen.
Moody’s expects Mobilink to maintain the largest market share by the number of subscribers and keep its market share of 27%-28% this year, given its strong brand and extensive network coverage. Its holding of the largest 3G spectrum in Pakistan will also help it maintain good network quality in 3G services. The company launched its commercial 3G services last July.
Despite a difficult 2014 with intense competitive pressure and regulatory changes such as the government’s implementation of a biometric verification system for all mobile subscriptions, Mobilink has maintained a strong financial profile for its B2 rating level.
Mobilink’s adjusted debt/EBTIDA rose closer to 2.0x in FY2014, from 1.1x in FY2013, due to the 3G spectrum payment of $300.9 million and $350 million in capex. However, leverage remains very strong for the rating level. Mobilink also maintains adequate liquidity with a cash balance of $35 million and undrawn committed lines totaling $171 million as of September 2014. Moody’s expects the company’s operating cash flows to total around $285 million in the next 12 months. These funds will be sufficient to cover its short-term debt of about $70 million and its total estimated capital expenditure of around $300 million.
While Mobilink’s rating does not include any uplift, its fundamental credit profile continues to incorporate ongoing operational and financial support from its indirect parents, Global Telecom Holdings SAE (unrated), and its ultimate shareholder, VimpelCom Ltd (Ba3 ratings under review for downgrade); both of which are globally diversified and larger telecommunications groups.
Given Moody’s guidelines regarding the differential between government and corporate ratings, it is unlikely that Mobilink will experience any upward rating pressure in the absence of an upgrade of Pakistan’s sovereign rating.
Alternatively, Mobilink would need to generate a substantially greater revenue share from outside Pakistan, which seems unlikely over the near to medium term. However, an upgrade is possible in the medium to long term if, in addition to a sovereign upgrade, Mobilink maintains its (1) strong market position with adjusted EBITDA margin in excess of 35%; (2) current solid balance sheet and financial profile; (3) strong relationships with its parents and banks; and (4) sufficient cushion under its bank loan covenants.
Mobilink’s ratings would be under downward pressure if the sovereign rating is downgraded, as Moody’s will seek to maintain the current gap of two notches between their ratings. Given Mobilink’s fundamental credit quality, it is unlikely its rating will be downgraded for reasons other than a downward sovereign rating action absent a precipitous decline in its financial and operating profile.
Such a decline would be evident if Mobilink: (1) experiences significant deterioration in its market share; (2) resumes paying dividends or increases management fees to its parent, thereby reducing the available retained cash flow to the extent that adjusted retained cash flow/debt falls below 20%; (3) faces difficulty in accessing capital to fund ongoing growth, or repay/refinance lines, as and when they fall due; or (4) sees signs of Global Telecom or VimpelCom not providing financial assistance, should there be any breach of covenants.
The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. Mobilink is the largest mobile operator in Pakistan by number of subscribers.