Fitch affirms Bahrain Telecommunications Company at 'BBB-'; outlook stable

The rating reflects Batelco's leading position in the domestic market, its robust free cash flow (FCF) on a group level despite elevated competition and EBITDA margin pressure.

Pre-dividend FCF generation is one of the strongest among peers in the Middle East, although the company is relatively small, with moderate international diversification compared to regional peers.

Batelco's IDR reflects Fitch's assessment of the sovereign's creditworthiness, given its strong operational and strategic ties with Bahrain. Batelco is 78% directly and indirectly owned by the Government of Bahrain ('BBB'/Stable).

Batelco is a flagship company and a strategic investment for the state as telecommunication is highlighted as a core industry. Fitch's approach and top-down notching methodology takes into account the assumed government support in line with Fitch's parent and subsidiary rating linkage methodology.

The company's acquisition strategy is focused on mobile and broadband operations in growth markets - management is not interested in capital-intensive greenfield operations. Batelco has recently expressed interest in Cable & Wireless Communications' Monaco and Islands business division but discussions are still in the early stages. In the event of any acquisitions, Fitch would expect the leverage metric (net debt to EBITDA) to remain within the 2x rating guideline and would then anticipate gradual deleveraging.

Government involvement in such decisions (expansion outside Bahrain through acquisitions) indicates inherent government support at the current rating level. Fitch also assumes that capital commitment by the State of Bahrain may be forthcoming for large-scale acquisitions, if needed.

The Stable Outlook reflects the limited growth prospects in the domestic telecom market. Batelco faces elevated competition in the domestic mobile market, which resulted in a double digit decline in the company's domestic revenue and EBITDA in 9M12 on a yoy basis.

Fitch expects the company to retain its post-paid subscriber base and a return to rational competition in 2013 that has proven disruptive to all market participants. The main risk for the company is the domestic operation, as it is facing competition from a new entrant, Viva, operated by Saudi Telecom Company, which is able to compete aggressively on price.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- An upgrade of the sovereign rating would be a positive credit factor due to strong linkage with the sovereign.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- A downgrade of the sovereign would not impact Batelco's IDR negatively as a sovereign downgrade would equalise the sovereign and Batelco's standalone ratings

- Aggressive acquisitions that breach the company's maximum net debt to EBITDA level or the failure to deleverage to below 2x (net reported leverage) in the short term after such an acquisition would be negative.