Pakistan Mobile Debt Buyback Plans Trigger Default Warning

The debt ratings agency, Standard & Poor's Ratings Services has warned that it considers Pakistan Mobile to be at risk of defaulting on a debt repayment. The mobile operator, owned by Orascom Telecom Holding recently announced plans to repurchase for cash up to US$100 million of its $250 million bonds due 2013, at a 23%-30% discount to face value.

"If the proposed transaction is completed, we would view it as being tantamount to default for two key reasons," said Standard & Poor's credit analyst Yasmin Wirjawan. "First, the offer represents a material discount to the par amount (or face value) of the outstanding issue. Second, we believe Mobilink could face difficulty in servicing its debt obligations or remaining in compliance with its covenants over the next one to two years."

That difficulty could be driven by funding risks stemming from the macroeconomic environment and the pressure on Mobilink's covenants, which S&P believes the company could face in June 2009, resulting in possible refinancing risk. This could partially motivate Mobilink's investors or counterparties to accept the offer.

S&P warns that Mobilink's credit profile has deteriorated over the past 18 months. The company has undertaken significant debt-funded capital expenditure and its competitive position and operating performance have weakened. Given the challenging operating environment in Pakistan and the company's weakened credit profile, S&P expects Mobilink to have reduced its budgeted capital expenditure, which could enable the company to generate positive free operating cash flows and thereby reduce debt.

"The offer expires on May 6, 2009, and if the proposed transaction is completed, we will lower the issue rating on the notes to 'D' and the corporate credit rating to 'SD' (for selective default). Thereafter, we will reassess Mobilink's financial and liquidity position and its actual and projected operating performances before assigning new ratings," said Ms. Wirjawan.

Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Pakistan Mobile Communications Ltd. (Mobilink) to 'CC' from 'B-'. The outlook is negative. At the same time, Standard & Poor's lowered its issue rating on Mobilink's US$250 million senior unsecured notes due 2013 to 'CC' from 'B-'.

Posted to the site on 17th April 2009