Fitch Ratings Affirms Etisalat's Debt Outlook As Stable

Fitch Ratings has affirmed UAE-based Etisalat's Long-term foreign currency Issuer Default Rating (IDR) at 'AA-'. The Outlook on the IDR is Stable. ­The rating reflects Fitch's assessment of the sovereign's creditworthiness, given Etisalat's strong operational and strategic ties with the UAE government and in the short term this is likely to be the key driver of any potential rating actions.

The assessment reflects Etisalat's strong ties with the UAE government since the company is 60.03%-owned by the UAE, and it is stipulated by law that state ownership cannot go below 60%. Fitch views government support as integral to the company's target to become a major telecoms operator, with seven out of 11 of the Board of Directors being government representatives, including the Chairman.

Fitch notes that the UAE will continue to be a major revenue and EBITDA contributor to Etisalat's consolidated financials over the long-term, despite rising contribution from international investments (at 10% and 1% of consolidated revenue and EBITDA respectively at FY08). A further decline in market share and some increased pricing pressure due to competition may be expected in a mature UAE market with a mobile penetration rate of around 190% at FYE08. Fitch notes that Etisalat's market share in 'new adds' was down to 40% in 2008.

Further expansion into the India, the Middle East and North Africa (MENA) region, exploiting the company's cash-rich balance sheet as well as direct support from the UAE government, is also factored into the current rating. However, Fitch is confident management will maintain a conservative financial policy, with a maximum gross debt/EBITDA of 2.5x (FY08: 0.2x gross debt/EBITDA; 0.4x net cash/EBITDA). The Stable Outlook reflects Fitch's view of the UAE market's limited growth prospects and that the company's existing international mobile operations in India, Egypt and Saudi Arabia will be a major source of growth. The ratings also consider potential regulatory and competitive challenges in the local market such as the introduction of mobile number portability in Q409. Fitch still does not expect the entry of a third mobile operator into the UAE market over the medium-term.

The rating could experience potential downward pressure if the sovereigns' creditworthiness changed or if there is an evidence of a significant weakening of the parent/subsidiary linkage between the UAE and Etisalat. One potential trigger of this would be a fall in the share of EBITDA derived from the UAE to below 50% of the consolidated EBITDA, which would increase Etisalat's risk profile on a stand alone basis. Fitch considers this unlikely over the medium-term, and even if it were to occur, the agency would consider the legal, operational and strategic links before taking any action.

Etisalat continues to generate strong free cash flow (AED4bn FCF in 2008) despite hefty loyalty and dividend payments; it had an EBITDA after capex of about AED13.8bn in 2008 and a consolidated 67% EBITDA margin. Adjusted net cash was AED6.9bn at FYE08 as in the previous three years.

However, Fitch expects group capex to edge up in 2009 due to new investment in India, including an expected cash outlay of USD1bn for the cost of a 3G license. Fitch notes that due to the considerable amount involved, there is uncertainty as to whether there will be a return on this Indian investment in the long-run. Excluding its operations in Egypt, Etisalat does not have full control over its major subsidiaries such as Mobily and PCTL and only received dividends from these operations in 2006-2008.

Posted to the site on 17th July 2009