Moody's Investors Service has assigned a definitive B1 corporate family rating to Banglalink Digital Communications Limited, Global Telecom Holding subsidary (GTHE), and a B1 senior unsecured rating to its $300 million, five-year senior notes due in 2019. The ratings outlook is stable. "The rating actions reflect our view that Banglalink's successful refinancing and changes to the terms and conditions of its existing shareholder loans -- two major conditions for the definitive B1 ratings -- will help improve its financial profile," says Yoshio Takahashi, a Moody's Assistant Vice President and Analyst. "In addition, Banglalink's 1Q 2014 results were consistent with our expectations," adds Takahashi. Banglalink completed the issuance of its $300 million, five-year senior notes due 2019 on 25 April. The cash proceeds from the transaction were used to repay the company's $231 million bridge loan as well as over 70% of its secured facilities totaling approximately $60 million as of April 2014. "Due to these repayments, we estimate that the proportion of short-term debt to total debt will fall to below 20% in 2Q 2014 from over 50% in 1Q 2014. This will significantly alleviate liquidity pressure, although we expect the company to continue to depend on external borrowings to finance negative free cash flow of BDT5 billion-BDT10 billion ($65 million to $130 million) in the 12-month period ending 30 June 2015," adds Takahashi. The company plans to prepay the remaining $17 million due under the New Hermes Facilities in the coming one to two months after obtaining the approval from the Board of Investment Bangladesh on the prepayment. The company had originally planned to make full repayment of the secured facilities within 10 business days after the receipt of the cash proceeds from its notes issuance. However, the plan has been delayed due to the requirement for government approvals. As a result of the delay, the company remains subject to financial covenants under the common-terms agreement for secured facilities as of June 2014. This could give rise to pressure around the debt service coverage covenant, although it is our expectation that Banglalink will obtain a waiver from its bank pending government approval for repayment of the amount outstanding. Banglalink also concluded an agreement with its direct parent, Telecom Ventures Limited (TVL, unrated), to change the terms and conditions of the existing shareholder loans in May 2014 such that they are subordinated to all other debt. Global Telecom Holding SAE (GTH, unrated) indirectly owns 99.99% of Banglalink through TVL. VimpelCom Ltd (Ba3 stable) owns 51.9% of GTH. Moody's plans to reclassify these shareholder loans as 100% equity from 2Q 2014. As a result, Banglalink's adjusted debt/EBITDA is expected to decline to approximately 3.0x-3.5x by December 2014, from 4.3x for the 12-month period ended March 2014. The ongoing operating and financial support from its parent, including the change of the shareholder loan agreement, support Banglalink's B1 rating, although the ratings do not explicitly incorporate any upward notching for this parental support. In Moody's view, Banglalink's fundamental credit profile is weakly positioned for its rating, given the funding requirements to support the company's growth as well as the challenging regulatory environment. Banglalink's 1Q 2014 results were also consistent with Moody's expectations. Its revenue increased by about 10% year-over-year in 1Q 2014, supported by a 13% rise in the number of subscribers, and despite a 2% year-over-year decline in its average revenue per user. The 10% revenue growth in 1Q 2014 represents a strong turnaround from the 13% revenue decline in 2013. The revenue decline in 2013 was mainly due to: (1) the regulator's request in December 2012 to disconnect illegal transmissions of international calls using voice over internet protocol; and (2) a nationwide strike in 4Q 2013 linked to the general election in January 2014. In the absence of extraordinary events such as those seen in 2013, Moody's expects Banglalink's revenue to grow by over 10% in 2014, supported by continued growth in its subscriber base, and expected growth of data revenue, given the launch of its 3G services in October 2013. Banglalink's reported EBITDA in 1Q 2014 improved by more than 20% year-over-year, excluding foreign exchange gains and losses, supported by the revenue growth and its good cost controls. As a result, the EBITDA margin on a same basis improved to 38% in 1Q 2014 from 34% in 1Q 2013. The stable outlook reflects Moody's expectation that Banglalink will maintain revenue and earnings growth, as well as low leverage, while reducing its negative free cash flow in the coming 2-3 years. Upward pressure on the ratings could arise if Banglalink: (1) significantly improves its market position without compromising EBITDA margins; (2) continues to grow its revenue and earnings by expanding the number of subscribers and data revenue; (3) achieves net profit and generates positive free cash flow on a sustained basis; and (4) significantly improves its liquidity profile. Specific indicators that Moody's would consider in upgrading the ratings include: adjusted EBITDA margins in excess of 45%; adjusted debt/EBITDA below 3.0x; adjusted free cash flow/debt in excess of 0%-5%; and adjusted debt/capitalization below 60% on a sustained basis. Downward pressure on the ratings could also emerge if Banglalink: experiences significant deterioration in market share and a material slowdown in revenue and earnings growth; fails to reduce negative free cash flows in the coming 2-3 years; encounters difficulty in accessing capital to fund growth or repay/refinance debt, as and when it falls due; experiences a fall in financial assistance from GTH or VimpelCom; or implements aggressive investment and shareholder return policies. Specific indicators that Moody's would consider for a downgrade include: adjusted EBITDA margins below 35%; adjusted debt/EBITDA above 4.5x; and adjusted debt/capitalization over 80% on a sustained basis. Banglalink, established in 1998, is the second-largest mobile operator in Bangladesh by the number of subscribers. Its subscriber base totaled 29.6 million at 31 May 2014. GTH, is an Egypt-based telecommunications operator with mobile operations in Pakistan, Bangladesh, Algeria, Canada, and sub-Saharan African countries. VimpelCom is a Netherlands-based global telecommunications service provider, with operations in 17 countries. Source: Moody's investor services
