Fitch Affirms Etisalat's Debt Ratings with a Stable Outlook

Fitch Ratings has today affirmed UAE-based state-owned Emirates Telecommunications Corporation's (Etisalat) Long-term foreign currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.

­The rating affirmation reflects Fitch's expectation that the company's management will maintain a conservative financial policy, with a maximum gross debt/EBITDA of 2.5x and continue to generate substantial majority of group EBITDA from the local UAE market by 2012-13. Fitch notes that the company recorded a net cash position over the last five years and that Etisalat's credit metrics will continue to be strong in the short to mid-term even with possible investment plans in 2010-11. The agency sees the free cash flow generation capability of the local UAE business as supporting the company's international expansion plans in the medium-term. Fitch also sees government support as integral to the company's target of becoming a major global telecoms operator as outlined below.

The rating also reflects Fitch's assessment of the sovereign's creditworthiness, given Etisalat's strong operational and strategic ties with the UAE. Etisalat is 60.03%-owned by the state, and it is stipulated by law that state ownership cannot reside under 60%. The agency's approach - and top-down rating methodology - takes into account the assumed government support in line with Fitch's criteria report: 'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)'.

The Stable Outlook reflects Fitch's view that the UAE's mobile telecommunications market is now mature with a 215% mobile penetration rate, and that the company's international mobile operations in India, Egypt and Nigeria will provide its major source of expansion. The ratings also take into consideration potential regulatory and competitive challenges in the local market, such as the introduction of mobile number portability in 2010-11. Fitch does not expect the entry of a third mobile operator into the UAE market, but notes the falling average revenue per user (ARPUs) and operating margins in the local market due to competition.

The substantial capex requirements of the international businesses remain the concern going forward, especially the Indian market which is a capital intensive market with some growth potential in the long-run. However, ARPUs are low in India's pre-dominantly pre-paid and competitive market and the agency will monitor the company's strategy in this market and its impact on consolidated financials over the medium-term.

The rating could experience potential downward pressure from any change in the sovereign's creditworthiness, or evidence of a significant weakening of the parent/subsidiary linkage. A fall in the share of EBITDA derived from the UAE to below 50% of the consolidated EBITDA, or any large debt-financed acquisition without governmental financial support, would increase Etisalat's risk profile on a standalone basis. However, Fitch considers this unlikely over the medium-term, and the agency would consider the legal, operational and strategic links before taking any rating action.