Fitch Affirms Telenor's IDR at 'BBB+'; Negative Outlook

Fitch Ratings has today affirmed the Norwegian incumbent telecoms operator Telenor's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+' and affirmed the Short-term IDR at 'F2'. The Outlook is Negative.

Fitch says that the ratings reflect Telenor's leading position as a geographically diversified trans-Nordic fixed-line and mobile operator, with an attractive portfolio of mobile assets in developing markets. In addition, the ratings are supported by the group's strong liquidity position and relatively low leverage.

"The high execution risks and sizeable capital spending requirements associated with the new greenfield project in India, along with the escalation of the ongoing shareholder disputes with the Alfa Group have increased Telenor's risk profile, building negative pressure on the ratings", says Apostolos Bantis, Associate Director in Fitch's TMT Group in London. "While recent results demonstrate stabilizing trends across the Nordic mobile business and in certain assets in Asia, the group continues to derive a sizable portion of its profitability from emerging markets, making it vulnerable to the economic slowdown and currency devaluation risk".

The recent entry into the Indian market through greenfield mobile operator, Unitech Wireless, is part of the group's strategy to target growth in emerging markets. While Fitch recognises the growth potential of the Indian mobile market, it believes that Telenor's assumptions to successfully penetrate what is considered to be one of the most competitive markets with very low average revenue per user (ARPU) are overly ambitious. Management's decision to suspend dividends for 2008 and possibly in 2009 partially mitigates the impact of cash absorption; however, the sizable capex requirements of this project will strain Telenor's cash flow generation over the next few years.

The longstanding conflict between Telenor and Alfa Group, its partner in Ukraine and Russia has now reached a climax. While both Telenor and the Alfa Group agreed on dividend payments from Kyivstar for the 2004 & 2005 fiscal years, with 2006-2007 dividends expected to follow soon, the legal battle over the Russian mobile operator VimpelCom is currently in full throw. Given the complexity of these issues it is difficult to assess the outcome and in Fitch's view these issues will protract for quite some time.

Despite the challenging macroeconomic conditions, Telenor's recent operating performance proved resilient, reflecting an EBITDA inflection within its Nordic mobile operations and stabilising conditions within certain assets in Asia. Telenor is now focussed on scaling back its cost and capex levels. Management reaffirmed their FY09 guidance for organic revenue growth in line with 2008 and EBITDA margins in the range of 34% (adjusted for Kyivstar).

While according to Fitch's projections the weakening of Telenor's net leverage (defined as net debt to EBITDA) pro forma for the Indian transaction does not by itself appear to pose a threat to the ratings, the Agency remains concerned about the impact on the group's cash flow profile given the sizeable capex requirements. Any significant deviation from the company's publicly announced capital spending guidance, linked to the Indian project, that will result in negative free cash flow generation for an extended period would likely result in a downgrade. In addition an unfavourable resolution to the shareholder disputes with the Alfa Group and a reversal of the recent stabilizing trends within the company's domestic mobile and certain Asian businesses could also have negative rating implications.

The 'F2' Short-term IDR reflects Telenor's strong liquidity. While near-term maturities are high (NOK11.4bn - including debt issued by subsidiaries), access to committed facilities (NOK27bn) along with strong cash and healthy cash flow generation should adequately support Telenor's liquidity needs. Total debt at end-Q109 stood at NOK52.7bn (EUR5.9bn), down from NOK56bn at FYE08, mainly due to favourable currency effects resulting in a net debt/LTM EBITDA of 1.4x. However, net leverage is expected to weaken in excess of 2.0x after adjusting for the Indian transaction.

Posted to the site on 18th May 2009