Mobile operator Zain Saudi Arabia is in talks with banks about raising up to $500m through a recapitalisation in order to repair its balance sheet after a poor financial performance in 2009.

The company is in talks with banks including Al-Rajhi and Banque Saudi Fransi (BSF), the local affiliate of France’s Credit Agricole, about appointing a bank to run the deal.

One banker looking at the deal says, “Zain needs to recapitalise and could look at raising up to $500m. It has faced a few debt problems during the past few months, but most of that is behind them now.”

During a recapitalisation, a company changes its debt to equity ratio, which could involve offering lenders the opportunity to exchange their debt for equity.

In July 2009, Zain raised a $2.5bn syndicated loan from local banks to finance the development of its network in the kingdom. Both Al-Rajhi and BSF played a large role in that deal. However, in January, the company said it was in breach of some of the covenants, or conditions, of the loan because the business was not growing as fast as it had told lenders it would. In 2009, the company reported a SR3.1bn ($844m) loss, expanding from a loss of SR2.28bn in 2008.

Bankers involved in the loan say the covenants have now been renegotiated.

“The 2009 financial results show that clearly a recapitalisation is needed,” says Shahid Hameed, head of asset management at Kuwait’s Global Investment House. “The company has been overleveraged from day one, when it borrowed heavily to buy the operating licence.” Zain did not respond to requests to comment on its proposed recapitalisation.

The firm, which is 25 per cent owned by Kuwait’s Zain, paid $6.1bn in 2007 for the third mobile licence in Saudi Arabia. “Saudi Arabia already has two well-established mobile operators, and Zain has had to cut prices to gain market share. It has also suffered from underinvestment from its shareholders,” adds Hameed.

The company is also in talks with the Finnish export credit agency Finnvera to help fund the build-out of the Saudi network.