Hong Kong, August 31, 2017 -- Moody's Investors Service has affirmed the B1 corporate family rating
of Pakistan Mobile Communications Limited (Jazz). The rating outlook
remains stable.
RATINGS RATIONALE
The rating action follows Jazz's announced sale of its wholly-owned
tower subsidiary, Deodar Private Limited, to edotco Group
Sdn Bhd, a 62.4%-owned subsidiary of Axiata
Group Berhad (Baa2 stable), for around $940 million.The
transaction is expected to complete by end-2017.
Jazz will enter into a service agreement for the 13,000 towers it
sold under a 12-year agreement. In return, Jazz will
receive $666 million in cash once the transaction closes,
with an additional $94 million within 12 months of the transaction.
The remaining $180 million of the sales price is expected to be
a vendor loan payable to Jazz three years from closing.
Moody's expects Jazz to utilize the proceeds toward a) funding operating
and capital expenditure, b) reducing absolute debt, and c)
using the residual proceeds for shareholder returns.
"The announced sale enables Jazz to monetize its non-core
tower assets to fund operations, improve liquidityand reduce balance
sheet debt levels," says Annalisa DiChiara, a Moody's
Vice President and Senior Credit Officer.
For example, Jazz will have ample funds to repay incremental debt
incurred to acquire additional 4G/LTE spectrum in June.
"However, although balance sheet debt will reduce, based
on Moody's standard operating lease adjustment which capitalizes
the present value of rental payments, we estimate Jazz's pro
forma adjusted leverage will increase to around 2.5-3.0x
by end-2017 from 1.7x as of June 2017," adds
DiChiara, also Moody's lead analyst for Jazz.
The increase in leverage can be accommodated at the B1 rating level,
given Jazz's leading market position and solid cash flow-generating
capabilities. Moody's expects leverage to trend towards 2.0-2.5x
over the next 24 months.
"We expect Jazz to maintain its market leading position with a subscriber
market share of around 38% this year, given its strong brand
and extensive network coverage, and largest spectrum holding among
domestic operators, following its recent spectrum purchase,"
adds DiChiara.
In Moody's view the tower sale proceeds will significantly boost Jazz's
liquidity position, providing sufficient funds to support projected
capital expenditures ($280-300 million), scheduled
debt maturities ($186 million) and projected dividends ($125-150
million) for the next 12 months.
Jazz also has other cash sources, including a cash balance of around
$62 million and long-term committed credit facilities of
around $243 million. Moody's also expects Jazz to generate
cash from operations of around $410-430 million over the
next 12 months.
Despite its strong fundamental credit quality, Jazz's B1 rating
is constrained by the sovereign's B3 rating.
As Jazz 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 (see Moody's Rating Implementation
Guidance document entitled "How Sovereign Credit Quality Can Affect Other
Ratings" and published on 16 March 2015).
The outlook is stable reflecting Moody's expectation for Jazz to
maintain its solid business and financial profile and adequate liquidity.
Given Moody's guidelines regarding the differential between government
and corporate ratings, it is unlikely that Jazz will experience
any upward rating pressure in the absence of an upgrade of Pakistan's
sovereign rating.
Alternatively, Jazz 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,
Jazz maintains its (1) strong market position with an adjusted EBITDA
margin in excess of 35%; (2) solid balance sheet and financial
profile; (3) strong relationships with its parents and banks;
and (4) sufficient cushion under its bank loan covenants.
Jazz'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 Jazz'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 Jazz: (1) experiences significant
deterioration in its market share; (2) pays large dividends,
thereby reducing 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.
The principal methodology used in this rating was Telecommunications Service
Providers published in January 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Pakistan Mobile Communications Limited (Jazz), which was established
in 1990, is Pakistan's largest mobile operator by number of subscribers.
The company is 85% indirectly owned by Global Telecom Holdings
SAE (GTH). GTH, which is headquartered in the Netherlands,
is a global telecommunications operator with investments in three countries:
Pakistan, Bangladesh and Algeria. In turn, GTH is 57.7%
indirectly owned by VEON Ltd. (Ba2 stable), which is domiciled
in Bermuda and headquartered in the Netherlands. VEON is a global
telecommunications provider with operations in 14 countries, including
strong market shares in Russia and Ukraine.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Annalisa Di Chiara
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
