RIYADH/DUBAI: Loss-making Zain Saudi , Saudi Arabia's No.3 telecoms company, launched a $1.6 billion rights issue on Tuesday to boost its balance sheet and help it fight back against rivals.

The group will use about $200 million of the share issue to repay part of a $2.6 billion Islamic loan that matures in July, top executives at the company firm told Reuters.

Most of the remainder will be spent on repaying founding shareholders and improving Zain Saudi's network.

"We are exploring options with the bankers, either to replace the facility immediately once it becomes due or have the facility extended for a short period," said Khalil Fawaz, Zain Saudi's chief financial officer. "An extension means we will have more time to finalise all the documentation. The new facility is expected to be for $2.4 billion dollars."

Zain has mandated five banks to refinance the rest of this facility.

Zain Saudi, in which Kuwait's Zain holds 25 percent, has yet to make a quarterly net profit nearly four years after launching services. It shares slumped to a record low this week as investors unwilling to subscribe to the rights issue sold to avoid holdings being diluted.

Kuwait's Zain will meet any shortfall in rights issue take-up by investors, so its 25 percent stake may rise.

Zain Saudi plans to use some of the proceeds to win back customers from better-resourced rivals Saudi Telecom and Etihad Etisalat (Mobily).

The group, which had debts of 22.9 billion riyals ($6.11 billion) at the end of March, will also use 2.54 billion riyals of the rights issue to convert loans from founding shareholders into equity.

About 1.1 billion riyals will be used to expand Zain's network and reduce its reliance on network roaming agreements with rivals to provide coverage in certain parts of the country.

"The interconnection cost will decrease significantly," said Fawaz. He did not reveal what percentage of Zain Saudi's coverage was provided by other operators.

This is central to Zain's attempt to arrest its falling mobile subscriber market share, which has declined from 18 percent in 2009 to 12 percent in 2011.

"The short-term strategy is to improve our operational performance as well as enhancing our product and services portfolio ... that will last maybe 12 months," said Chief Executive Fraser Curley. The main challenge after that was to meet or exceed network coverage, quality and product and services of competitors, he said.

Curley said Zain Saudi had a long-term target to reach a 30 percent market share and said he would be "disappointed" if the company failed to break even by 2015.

The rights issue follows Zain Saudi's capital restructuring last week which cut the group's capital to 4.8 billion riyals from 14 billion to alleviate accumulated losses, which topped 10 billion riyals at the end of March.

"The capital restructuring just makes Zain Saudi a going concern again - it's unlikely to be profitable for years because it still needs to spend billions on infrastructure - if it doesn't beef up its 3G services it can't win market share," said Amine Bentaleb, director of asset management at Arqaam Capital in Dubai.