OREANDA-NEWS. Fitch Ratings has changed Bahrain Telecommunications Company's (Batelco) Outlook to Negative from Stable while affirming its Long-term Issuer Default Rating (IDR) at 'BBB-'. Fitch has also affirmed the unsecured rating of Batelco International Finance No. 1 Limited at 'BBB-'.

This rating action follows Fitch's revision of the Outlook on the sovereign rating of Bahrain to Negative from Stable and the affirmation of its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively on 4 December 2015 (see 'Fitch Revises Bahrain's Outlook to Negative, Affirms at 'BBB-' at www.fitchratings.com)

KEY RATING DRIVERS
Government Support
Batelco's rating is notched up a level from the company's 'BB+' standalone rating for government support, in case of need. Although Batelco's financial profile remains strong and the domestic operating environment is improving, the current standalone rating level takes into account the political and economic risk of the countries its international operations are in.

Batelco's ratings may be negatively impacted if Bahrain's sovereign rating (BBB-/Negative) is downgraded.

Domestic Market Still Key
The domestic market remains core to Batelco's earnings although its share of EBITDA fell to 46% in 2014 from 60% in 2012. The acquisition of operations in the Maldives, the Channel Islands and the South Atlantic has somewhat improved the risk profile of Batelco's international portfolio. However, 25% of the group's EBITDA in 2014 still came from Jordan, a higher-risk country.

Improved Regulatory Environment
The regulatory environment in Bahrain has significantly improved for Batelco over the past 12 months. In March 2014, the Bahraini telecoms regulator said that mass-market broadband services were competitive and has removed regulatory obligations which previously applied to Batelco's mass-market fixed broadband services, resulting in the deregulation of approximately 90% of broadband services in Bahrain.

The subsequent removal of bundling and price restrictions has significantly improved Batelco's ability to react and compete in the market. Discussion over the National Broadband Network is on-going. However, Batelco has begun a roll-out of fibre network and has managed to grow fixed-line market share without significant regulatory intervention.

Competitive Domestic Mobile Market
Fitch believes competition in the Bahraini mobile market is stabilising as pricing becomes more rational and expects that Batelco will be able to maintain or grow market share, albeit with some continued pressure on average revenue per user (ARPU).

The competitive environment deteriorated following Viva's entry in the mobile market in 2010, which resulted in significant market share losses for Batelco. Price competition intensified significantly over 2011-2012, which placed significant pressure on Batelco's revenue and churn rates.

Financial Flexibility Remains Strong
Fitch's views Batelco's financial profile as strong, underpinned by our expectation of a conservative leverage profile, strong cash flow generation and a sound liquidity profile over the medium term. Fitch projects Batelco's net debt/EBITDA ratio to increase to 0.6x in 2015 (2014: 0.2x) due to spectrum payments but to remain below 0.5x in 2016 and 2017 on free cash flow generation and a conservative shareholder remuneration policy.

Government Ownership
Batelco is 78% directly and indirectly owned by the Government of Bahrain. The Bahraini Government is invested in Batelco via Bahrain Mumtalakat Holding Company (37%, BBB-/Negative), Amber Holding (20%) and the Social Insurance Organization (SIO; 21%). Bahrain-based diversified investment holding company, Mumtalakat is 100% owned by the Bahrain government and is the government's investment arm. Through these entities, the Bahraini government exerts strong control over Batelco, and is represented in six out of the 10 Directors, with three being from Mumtalakat (including the Chairman), one from SIO and two from Amber Holding.

KEY ASSUMPTIONS
-Revenue to stabilise in 2015, and to grow 3% p.a. in 2016 and 2017;
-Overall revenue market share in key Bahraini market to increase with improved regulatory environment;
-EBITDA margin to decline to 35% in 2015 before increasing gradually to 36.5% by 2018;
-Capex (inc. spectrum) to increase to 35% of revenue in 2015, driven by spectrum payments before reducing to 15%-20% in 2016-17;
-Annual dividend payments of approximately 95% of net income; and
-No material M&A.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- Pressure on free cash flow driven by EBITDA margin erosion, consistently higher capex and shareholder distributions, or significant underperformance in the core domestic market and at other key subsidiaries
- Debt-funded acquisitions leading to an increase in funds from operations (FFO) net leverage above 3.5x (0.7x at end-2014) with failure to deleverage below such threshold within the next 18 months
- A weakening in the linkage with the sovereign, which would be a negative credit factor, as would any possibility of the sovereign rating becoming speculative-grade. Batelco as a state-owned entity is highly unlikely to be rated higher than the sovereign.

The rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. Future developments that could lead to an upgrade include:
- An upgrade of the sovereign rating in conjunction with Batelco receiving formal support from the Kingdom of Bahrain.

For the sovereign rating of Bahrain (BBB-/Negative), Fitch outlined the following sensitivities in its rating action commentary of 4 December 2015:

The main factors that could lead to a downgrade are:
- Failure to reduce the fiscal deficit sufficient to stabilise the government debt-to-GDP ratio.
- Severe deterioration of the domestic security situation.

The rating Outlook is negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to positive rating action:
- Implementation of fiscal measures which reduce the budget deficit and are consistent with the stabilisation and then decline of the government debt-to-GDP ratio in the medium term.
- A broadly accepted political solution that eases political unrest.
- A recovery in oil prices that improves public finances.