Pakistan Mobile #B# Rating Affirmed With Stable Outlook After Divestment Of Tower Infrastructure Business

Stocks and Financial Services Press Releases Tuesday September 12, 2017 17:23
SINGAPORE--12 Sep--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Sept. 12, 2017--S&P Global Ratings affirmed its 'B' long-term corporate credit rating on Pakistan Mobile Communications Ltd. (Jazz), a Pakistan-based wireless service provider. The outlook is stable.

We affirmed the rating because we believe the recent sale of the telecom tower infrastructure business does not adversely affect Jazz's business profile. In our view, the divestment of the telecom tower assets is in line with Jazz's objective of becoming less asset-heavy and more focused on technology and digital enterprise. We expect the company to maintain its No. 1 position in Pakistan's competitive cellular market, after it was further strengthened by its acquisition of Warid Telecom (Private) Ltd. in 2016. Jazz has a 37.6% market share of subscribers in Pakistan as of May 2017.

Jazz divested about 13,000 telecom towers (held in a wholly owned subsidiary, Deodar (Private) Ltd.) in August 2017 for about US$940 million. The transaction is awaiting regulatory approvals, and we expect it to be completed by the end of 2017. Jazz plans to use the proceeds toward partial debt repayment, funding its 4G network roll-out, and possible shareholder distributions.

We estimate Jazz's overall leverage to increase to 2.0x-2.5x over the next three years, higher than our previous estimate of less than 1.5x. This higher leverage is largely driven by our view of the periodic payments for the use of towers as a debt-like obligation.

We expect Jazz to sustain annual revenue growth of 4%-5% over 2018 and 2019, led by higher 3G and 4G data consumption, which will partially mitigate the impact of stagnating and gradually declining voice revenues. Jazz's

pan-Pakistan network coverage, good brand presence, and entry into 4G with the integration of Warid Telecom will support such growth. While Jazz's above-average profitability supports its business position, we believe the country and macroeconomic risk of Pakistan will continue to weigh on the company's credit profile.

The stable outlook on Jazz reflects the outlook on our sovereign credit rating on Pakistan.
We could lower our rating on Jazz if we lower the sovereign rating or the transfer and convertibility assessment on Pakistan. This could happen if Pakistan's external and fiscal performance weakens.
We are unlikely to lower the rating on Jazz if the company's operating and financial performances deteriorate, given that its stand-alone credit profile (SACP) is two notches above the corporate credit rating.

However, we may lower the SACP by one notch if Jazz's ratio of FFO to debt falls below 30% sustainably. This could happen if the company experiences weaker subscriber and revenue growth even as it steps up investments toward the 4G network rollout.

We could upgrade Jazz if we raise the sovereign credit rating on Pakistan. The company's better operating performance could only improve its SACP, given the sovereign rating constraint. However, we are unlikely to raise the SACP unless Jazz attains a dominant market share and improves its geographic diversity.

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