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Fitch Affirms Orascom Telecom Tunisie at 'BBB-'; Outlook Stable

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Fitch Ratings has affirmed Orascom Telecom Tunisie's (OTT) Long term foreign and local currency Issuer Default ratings (IDR) at 'BBB '. The Outlooks on both ratings are Stable. Fitch has also affirmed OTT's National Long term rating at 'A (tun)' with a Stable Outlook.

The ratings reflect OTT's robust free cash flow (FCF) generation and strong credit metrics compared with peers in the Middle East and North Africa (MENA). However, the company's high operating profitability and leading position in the Tunisian market under its popular Tunisiana brand may come under some pressure from intensified competition of a third new mobile operator, run by the Divona/Orange-France Telecom consortium, launching in the next month or two.

The Stable Outlooks reflect Fitch's expectation that OTT will continue its strong operating performance in 2009-10 despite increased competition; it recorded a 54.7% EBITDA margin in 9M09. Fitch expects net debt/EBITDA to improve further to 0.1x at FYE09 from 0.45x at FYE08 due to ongoing strong FCF generation. .

As the Tunisian mobile market has a high penetration rate at around 90%, with limited potential for organic growth in the medium term, Fitch believes the entry of a new operator will put further pressure on ARPUs in the long term. If the regulator introduces mobile number portability (MNP), which Fitch views as likely in 2010-2011, this may benefit the new entrant. Nevertheless, the agency believes that in terms of coverage and service quality, OTT will have a significant edge over the new competitor.

Orascom Telecom of Egypt and Wataniya of Qatar Telecom ('A+'/Stable) each owns 50% of OTT and have equal managerial control. The shareholders are expected to sell a total 15%-20% stake on the Tunisian stock market in H1 2010, but their equal control of the company will not change after the IPO. OTT's ratings are based on the stand-alone performance and financial profile of its Tunisiana-branded mobile business. The recent financial problems at the Orascom Telecom level are not expected to affect OTT's operating performance or stand-alone profile.

The ratings also factor in the expectation that the business will continue its current dividend policy, with a maximum payout ratio of 100% in 2009 and beyond to its shareholders. Though dividend distribution remains a concern, the company management's stated commitment to retire debt early since 2007 and convertibility restrictions in Tunisia make the risk of special dividends less likely.

Significant declines in market share leading to considerably lower operating margins and deterioration in the leverage metrics would be negative for the ratings in the long-term.

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