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
