Telenor Ratings Downgraded to Negative Outlook on Indian Financing Woes

Fitch Ratings has revised Norway-based telecommunications provider Telenor's Outlook to Negative from Stable. At the same time the agency has affirmed Telenor's Long-term Issuer Default (IDR) and senior unsecured rating at 'BBB+' and affirmed the Short-term IDR at 'F2'.

The Negative Outlook follows Telenor's announcement that it is considering alternatives to the previously announced NOK12bn equity issue that was to be used to finance the group's entry into the Indian mobile market.

On 28 October 2008 Telenor announced that it will inject US$1.1bn for a 60% interest in Unitech Wireless, a greenfield mobile operator. This capital injection will be used to cover the initial funding requirements for the next three years, including the accumulated estimated capex of US$2bn. Although Telenor had initially stated that the majority of the Unitech investment will be financed through a NOK12bn equity issue to be completed during Q1 '09, which in Fitch's opinion would have allowed it to retain a credit profile in line with a 'BBB+' rating, management is now evaluating other alternative options including new debt, asset sales and lower dividends.

"The combination of the sizable capex requirements and high execution risk associated to the new greenfield project in India, along with worsening macroeconomic conditions and increased currency risk are adding negative pressures to the rating," says Apostolos Bantis, Associate Director in Fitch's TMT Group in London. "While these pressures would have been mitigated by an equity issue, other options could impact the company's financial flexibility and stretch credit metrics beyond the acceptable range for the current ratings."

The Indian investment is part of the company's strategy to derive growth from emerging markets. With a population of 1.2 billion and a low penetration rate of 26% the potential for mobile telecommunications expansion in India is indisputable. However Telenor will face increased challenges to penetrate what is considered to be one of the most competitive and overcrowded mobile markets with very low average revenue per user (ARPU), while the sizable capex requirements will strain the company's cash flow generation over the next three years. Furthermore, the new project comes at a time where global growth prospects have reduced dramatically.

Telenor's ratings continue to be underpinned by its leading position as a geographically diversified trans-Nordic fixed and mobile operator, with a growing portfolio of mobile assets in developing markets, and sufficient liquidity resources to meet its short-term obligations.

Telenor's recent results reflected a satisfactory performance across most of its portfolio, with stabilising conditions in the Nordic operations. However Fitch notes that a sizable portion of Telenor's profitability is derived from emerging market assets making it vulnerable to the economic slowdown and currency devaluation risk. Downward pressures have started to emerge in some of the company's developing assets, particularly Pakistan and Bangladesh, which have experienced notable ARPU declines. Management reaffirmed their FY08 outlook for positive organic revenue growth of 3% and EBITDA margin in excess of 31%.

A downgrade may occur if the financing structure decided upon for the Unitech acquisition leads to adjusted net debt to EBITDA in excess of 2.5x, a level which Fitch considers the lower boundary for a 'BBB+' rating for a group with Telenor's risk profile. Conversely, Fitch is likely to stabilise the outlook should the final financing structure of the Indian project be expected to keep adjusted net leverage below 2.0x. Further developments in the ongoing dispute with the Alfa Group in respect of Kyivstar and Vimpelcom also have the potential to change the ratings and outlook.

The 'F2' Short-term IDR reflects Telenor's strong liquidity. While short-term maturities are high (NOK7bn over the next year), and some refinancing risk starts to concentrate over the next three years, access to committed facilities along with a healthy cash balance and dividends from international investments are expected to adequately support Telenor's liquidity needs. Total debt at Q308 increased modestly to NOK48.1bn, from NOK47.2bn at YE07, giving an unadjusted net debt to EBITDA ratio of 1.4x.

Posted to the site on 28th November 2008