Dialog Sri Lanka preference shares get AA+ rating from Fitch

April 20, 2007 (LBO) - Dialog Telekom's five billion rupee preference share issue had been rated AA+ (lka), a notch below the telco's senior debt rating of AAA (lka), Fitch Ratings said Friday. The company is 87.67 percent owned by Telekom Malaysia Berhad.

"The one-notch difference between the issuer and preference shares' ratings reflects the subordination of the latter to Dialog's other debt obligations, as well as the high investment grade rating of Dialog," Fitch Ratings said.

"Dialog's preference shares are subordinated and rank senior only to the ordinary shares. Annual balloon repayments are required for the preference shares over the five year redemption period, with investors being granted the option to defer the first three repayments to two equal redemptions during the fourth and fifth year," the rating agency added.

Confirming the firm's AAA (lka) rating, Fitch said the outlook was stable.

"In line with Fitch's hybrid-securities methodology, no equity credit is considered for preference shares reflecting the maturity of the security, which is less than five years," Fitch said.

"Furthermore, the ratings are supported by Dialog's leading position in Sri Lanka's mobile telephony market, its strong operating cash flow generation and continued robust growth prospects.

"The company's credit metrics are currently very strong."

Fitch says Dialog will be free-cash-flow-negative over the next three years because of planned investments, but Dialog is expected to maintain its credit metrics at levels acceptable for the current ratings.

In 2006, Dialog reported revenues of 25.7 billion rupees (up 42 percent) and earnings before interest, tax depreciation and amortization (EBITDA) of 13.7 billion rupees (up 46 percent) over 2005.

"Its market share slipped marginally during the year to around 57 percent, reflecting an increasingly competitive environment," Fitch said.

"As a result of changing market conditions and tariff reductions implemented during the course of the year, Fitch notes that quarter-on-quarter revenue growth was moderate."

But Dialog has managed to maintain its average revenue per user (ARPU), thanks to increased minutes of usage.

Fitch says the company expects to launch fixed wireless and WiMax-based broadband services during the second half of 2007, adding further diversity to its revenue streams.

On a group basis, Dialog's capital expenditure for 2007 to 2009 is approximately 675 million US dollars, which Fitch expects to be funded largely by internally generated cash and external rupee sources.

Its current liquidity position is sound with 2.3 billion rupees in cash reserves against current debt maturities of 1.2 billion rupees.

"A large part of short-term vendor financing facilities is also expected to be refinanced with long-term loans in due course," Fitch said.

"Dialog's overall debt maturity profile is good and is expected to remain acceptable, even during the forthcoming period of heavy investments."

Currently the largest mobile phone services provider in Sri Lanka, Dialog is diversifying its business into fixed-wireless, broadband and pay-TV services.

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