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Rating Action:

Moody's changes outlook on Pakistan Mobile Communications Limited's (Jazz's) B1 CFR to negative

21 Jun 2018

Hong Kong, June 21, 2018 -- Moody's Investors Service has revised to negative from stable its outlook on the B1 corporate family rating (CFR) of Pakistan Mobile Communications Limited (Jazz).

At the same time, Moody's has affirmed the company's B1 CFR.

RATINGS RATIONALE

On 20 June 2018, Moody's changed the outlook on Pakistan's sovereign rating to negative from stable and affirmed the country's B3 local and foreign currency long-term issuer and senior unsecured debt ratings.

"Despite Jazz's strong fundamental credit quality, the company's B1 CFR is constrained to no more than two notches above the sovereign's B3 rating," says Annalisa DiChiara, a Moody's Vice President and Senior Credit Officer. "As a result, we have changed Jazz's rating outlook to negative, in line with that of Pakistan's sovereign rating, depsite the company's sollid business fundamentals."

Because 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.

Non-financial corporates are not usually rated more than two notches above the sovereign (see Moody's rating implementation guidance document titled How Sovereign Credit Quality Can Affect Other Ratings, published on 16 March 2015).

"We continue to take into account Jazz's strong fundamental credit quality by affirming its B1 CFR, which is at a rating level two notches above that of the sovereign," adds DiChiara, who is also Moody's Lead Analyst for Jazz. "We expect that Jazz will maintain its leading market position in the telecom market in Pakistan and preserve strong financial metrics for its rating level."

Despite intense competition in a highly fragmented market and the difficult regulatory environment, Jazz continues to grow its revenue and subscriber base, partly reflecting the solid growth in mobile data revenue, owing to higher bundle penetration and continued network expansion.

Moody's expects that Jazz will maintain its market leading position given its strong brand and extensive network coverage, and largest spectrum holding among domestic operators.

Jazz had about 55.5 million customers at May 2018, equating to a subscriber market share of 36.9%, as of the same date, according to the Pakistan Telecommunication Authority (PTA).

Jazz's financial profile will remain strong for its B1 rating level, with leverage -- as measured by adjusted debt/EBITDA -- likely to remain below 1.5x and EBITDA margins to stay in the 50%-55% range.

Moody's expects that Jazz's cash and projected cash flow over the next 12 months to be sufficient to cover projected capital spending, working capital needs and short-term debt maturities.

In addition, Jazz's liquidity position should improve following the receipt of proceeds from the disposal of its tower assets. Proceeds will be used to pre-pay around 25% of total debt following an agreement with lenders and provide sufficient funds to support Moody's projected level of dividends of around PKR26 billion.

Around 25% of the company's total reported debt was denominated in US dollars at 31 December 2017. Although the majority of Jazz's US-dollar debt is unhedged, we believe the company's strong financial metrics provide a buffer to absorb a significant depreciation in the Pakistani rupee, as we estimate that a 20% depreciation in Pakistani rupee would only cause a slight increase in leverage of around 0.3x.

Jazz's rating does not include any uplift from its indirect parent, Global Telecom Holdings SAE (GTH), and its ultimate shareholder, VEON Ltd. (Ba2 stable); both of which are globally diversified and larger telecommunications groups.

While VEON has demonstrated its direct financial support to GTH by extending shareholder loans and guaranteeing some of its debt, VEON's direct support to Jazz has been limited to the sharing of technology, procurement and management expertise.

Jazz accounted for 16% of VEON's revenue in fiscal 2017, rendering a modest contribution to its parent company.

Given Moody's guidelines on 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 for Moody's to upgrade the company's CFR. However, this scenario seems unlikely over the near to medium term.

Nevertheless, 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) current solid balance sheet and financial profile; (3) strong relationships with its parent and banks; and (4) sufficient buffer under its bank loan covenants.

Jazz's rating would be under downward pressure if Moody's downgrades the sovereign rating, because 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 credit profile.

Such a decline would be evident if: (1) its market share in Pakistan declines significantly; (2) it pays large dividends; thereby reducing the company's available retained cash flow to the extent that its adjusted retained cash flow/debt falls below 20%; and (3) the company faces difficulty in accessing capital to fund growth, or repay or refinance credit 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 had 55.5 million customers, or a market share of around 36.9%, at May 2018, according to the Pakistan Telecommunication Authority.

Jazz is 85% indirectly owned by Global Telecom Holdings SAE (GTH).

GTH, headquartered in the Netherlands, is a global telecommunications operator, with investments in three countries: Pakistan, Bangladesh and Algeria. 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 12 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

No Related Data.
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