Mar 03, 2009 (LBO) - The 'AAA(lka)' rating on Sri Lanka's Dialog Telekom was cut by two notches to 'AA(lk)' Fitch Ratings, following price competition which is weakening margins and rising costs, Fitch Ratings said.
Fitch has also downgraded the long-term rating on Dialog's of 4.5 billion rupee cumulative redeemable preference shares by two notches to 'AA-(lka)' from 'AA+(lka)'.
The outlook has been cut to negative from stable.
Fitch said the downgrades reflected a deterioration in Dialog's credit profile due to continuing price competition and inflationary pressures on its cost structure.
Earnings before interest, tax, depreciation and amortization (EBITDA) had fallen 41 percent over 2008.
Fitch said the rating factored in support from Dialog's 83.3 percent shareholder TM International Berhard, majority board representation and Dialog's association with TMI's brand, common creditors and associated reputation risk to TMI.
TMI had already deferred 2008 dividends, provided soft loans and an explicit corporate guarantee on debt.
"Fitch notes that TMI's support will continue to play an integral role in maintaining Dialog's ratings at the present level," the agency said.
"The ratings could be downgraded further if there is a negative change to TMI's intention or ability to extend support, or if there is a further material deterioration in Dialog's credit profile."
Dialog's rating of its outstanding redeemable preference shares reflected the subordinate nature of the instrument.
Though Dialog has started a group-wide cost cutting exercise, through which it expects to improve EBITDA margins in 2009, Fitch says the outlook cut reflects concerns that the firm's credit profile could further weaken due to price competition.
There was also uncertainty over the extent to which the company's planned cost rationalizing efforts will be successful.
Profitability as measured by EBITDA margin had fallen to 23% at the end of the 2008 financial year from 43 percent in 2007.
At the end of the 2008 financial year mobile operations accounted for 92 percent of Dialog's group revenue.
The growth of alternative revenue streams such as fixed wireless, pay TV and broadband have been stifled by inflationary pressures on disposable income and the resulting impact on market penetration and usage levels, as well as competition.
The group's debt maturities peak in 2009 with 18.8 billion rupees of debt up for repayment.
The debt includes 4.9 billion rupees in loans from TMI, on which Dialog is likely to benefit from some repayment flexibility, if required.
The company has indicated the availability of committed undrawn credit lines which cover its commercial debt maturities in 2009 while external financing is being sought to fund capital expenditure which is largely discretionary, Fitch said.
Dialog has also rationalised its capital expenditure for 2009, proportionately increasing investments with near-term returns such as building mobile network capacity and quality.
But Fitch expects Dialog to face some refinancing risk over the medium term driven by its continued negative free cash flow generation.
"However the agency takes comfort from Dialog's access to banks, which is underpinned by TMI's majority shareholding," Fitch said.
Updated