Orascom Telecom outlook to neg on downgrade of Pakistani subsidiary; 'B+' rating affirmed

At the same time, Standard & Poor's affirmed its 'B+' long-term corporate credit ratings on Orascom Telecom and Orascom Telecom Finance S.C.A. and its 'B-' issue rating on the $750m senior unsecured notes issued by Orascom Telecom Finance.

"The outlook revision reflects concerns that a weakening economic environment in the Islamic Republic of Pakistan (foreign currency CCC+/Negative/C; local currency B-/Negative/C) may result in lower-than-originally expected returns from the Pakistani market for Orascom Telecom,"

said Standard & Poor's credit analyst Michael O'Brien.

"Mobilink is Orascom Telecom's second largest operation, providing substantial cash flow on the basis of upstreamed management fees and representing a significant 25% share of the group's consolidated EBITDA in the first half of 2008," he added.

Although immediate liquidity needs at Mobilink are deemed to be covered and the company has flexibility to modify its investment plans, any increase in exposure to future potential funding risks at Mobilink will burden Orascom Telecom, given its strong incentive and need to support its 100%-owned subsidiary in financial management and financial covenant compliance. This is because any hypothetical default at Mobilink above $25m would trigger a cross-acceleration on Orascom Telecom Finance's $750m notes and a default or cross-acceleration at Mobilink above $50m would trigger a cross-default on Orascom Telecom's $2.5bn senior secured bank facilities.

"The negative outlook indicates that the ratings could be lowered if Orascom Telecom's liquidity profile weakens due to funding risks materializing in any part of the group's portfolio, or as a result of operating underperformance," said O'Brien. "We currently consider Orascom Telecom's liquidity to be adequate and operating performance to be in line with the ratings, but a weakening of the group's liquidity position, particularly in Pakistan, or excessive tightening of covenant headroom at Mobilink would lead to a rating downgrade. A material increase in debt or deterioration in cash flow generation could also pressure the ratings."