Moody's Investors Service has today placed the Baa2 long-term issuer rating of Oman Telecommunications Company (Omantel) on review for downgrade.

The decision to place the rating on review for downgrade was prompted by the announcement that Omantel had signed a share purchase agreement to acquire 12.1 per cent of Mobile Telecommunications Company KSCP (Zain) for a total cash consideration of $1.35 billion (RO520 million).

Moody's expects adjusted debt/EBITDA will increase to levels post acquisition that are no longer commensurate with a baa2 Baseline Credit Assessment (BCA) rating or standalone rating. This also considers the 9.8 per cent stake in Omantel for $846.1 million that was fully debt-funded.

Moody's review will focus on assessing overall impact on Omantel's credit profile including the funding plans in support of the transaction. The transaction is subject to completion of a public auction pursuant to trading rules of the Boursa Kuwait which has been set for 12 November 2017; and completion of a public auction pursuant to trading rules of the Boursa Kuwait. Moody's expects to conclude its review once these conditions precedent have been met and the transaction has then been consummated.
Ratings rationale

Moody's expects that adjusted debt/EBITDA will register 3.5x at Financial Year Ended (FYE) 31 December 2017 due to the addition of $2.2 billion in debt as part of Omantel acquiring a 21.9 per cent stake in Zain. Debt/EBITDA however is expected to reduce back below Moody's Baa3 ratings guidance of 2.75x within 12-18 months.

This analysis factors only Omantel's proportionate share of dividends flowing from Zain. Furthermore, Moody's forecasts no further acquisitions which would result in a material deviation away from Omantel's forecast reduction in debt/EBITDA levels. Further acquisitions, if debt funded, would likely result in further downward pressure on Omantel's BCA.

Moody's also would expect that Omantel would adhere to its track record of preserving of a very strong and robust liquidity profile at all times.

Moody's sees limited execution risk in Omantel delivering synergies identified from the transaction with Zain. This is an important analytical consideration underpinning Omantel's ability to increase EBITDA and pay down debt. Omantel will add to EBITDA by aggregating Zain's traffic and data service to its wholesale platform which will allow Omantel to benefit from the increased volumes.

The assumption of very high dependence is based upon no material variation in default correlation between Omantel and the Government of Oman.

Omantel's economic participation is limited to attributable dividend flows from Zain as opposed to revenue realization. Moody's dimensions revenue as only being realized from Oman given that Omantel only has a 21.9 per cent equity interest in Zain.

This is despite the geographic diversification outside of Oman that the investment brings. Geographic diversification is considered through the strength and reliance underpinning Zain's dividend flows.

Similarly, the transaction would not change the likelihood of strong support for Omantel by the Government of Oman. The high profile and pioneer nature of the acquisition has ensured widespread and heightened attention from the Government of Oman. The transaction is likely to pave the path for further diversification by government owned corporates in Oman and thus its success is pivotal to broader strategic initiatives and imperatives for the government of Oman.

The methodologies used in this rating were Telecommunications Service Providers published in January 2017, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Omantel is the incumbent telecommunications service provider in Oman (Baa2 negative). The company derives 99 per cent of its revenues from its Omani operations. Its primary competitor is Ooredoo Oman, which is in turn a 55 per cent subsidiary of Ooredoo. Omantel reported revenues of RO521 million ($1.35 billion) for the LTM ended June 30, 2017. – TradeArabia News Service