Fitch affirms Etisalat at 'A+', outlook stable

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Sept 26 (Reuters) - (The following statement was released by the rating agency)

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

Etisalat's IDR is underpinned by its strong linkage with the UAE government from which its rating is notched down on a top-down basis due to Fitch's assessment of strong legal, operational and strategy ties between the two, in accordance with the agency's Parent and Subsidiary Linkage criteria. The limited notching differential between the UAE sovereign and Etisalat ratings reflects Fitch's view that there are limited risks that the links between the two may weaken in the future.

Etisalat's ratings are also supported by its strong cash flow generation profile with double digit pre-dividend FCF margins projected to continue in medium term, and its leading market position in the protected two-player UAE market where it can count on a revenue market share of approximately 70% and generates EBITDA margins in excess of 55%.

The affirmation also reflects Fitch's assessment of the neutral impact on Etisalat's credit profile of the potential acquisition of Vivendi's (BBB/Stable) 53% interest in Maroc Telecom (MT) for a price consideration of EUR3.9bn (USD5.1bn). MT is Morocco's leading incumbent player with estimated market shares of 45% and 91% in the mobile and fixed-line telecom market, respectively in H113. The transaction is likely to close in Q413-Q114, pending certain regulatory approvals and the resolution of certain shareholder-related matters, and will be fully debt-funded. Fitch notes that post-completion of the acquisition, Etisalat's shareholding may increase up to a maximum of 70% of MT.

KEY RATING DRIVERS

Sovereign Linkage

The IDR reflects the strong linkage to the UAE government, which currently owns 60.03% of Etisalat. Fitch notes that according to federal laws, the government's stake cannot fall below 60%. Fitch also views government support as integral to the company's international expansion plans.

M&A Diversification

Fitch believes the likely acquisition of MT would represent a strategic fit within Etisalat's wider portfolio of companies, including its existing African footprint. The contribution of MT is viewed positively as it will improve Etisalat's international portfolio, which Fitch currently views as weak relative to its strong domestic business. This is largely attributable to the fact that Etisalat holds non-leading positions in certain markets characterised by intense competition and exposure to macro-related risks. Fitch notes that although MT has recently experienced some downward trend in revenues and EBITDA due to pricing pressure from competition and regulatory measures in the domestic market, its high EBITDA margin and strong cash flow generation are yet likely to result in a stable dividend flow for Etisalat over the medium term.

Increased Competition in UAE

The ratings take into account Fitch's view of a mature telecom market in Etisalat's domestic market where it generates the vast majority of its EBITDA (72% in H113). While Etisalat's rating is supported by the its strong domestic market share, which is viewed as an important driver of the rating, Fitch notes that high penetration rates of mobile services and potential regulatory measures on mobile number portability as well as on bit-stream internet access could lead to sustained competition over the medium term and thus place pressure on Etisalat's business risk profile and operating profitability. However, Fitch expects strong cash flow generation to continue in the medium term with low double-digit pre-dividend FCF margins, underpinned by the company's above sector average EBITDA margin.

Leverage to Increase

Fitch anticipates a significant increase in financial leverage upon completion of the fully debt-funded acquisition of MT. Under Fitch's scenario analysis, which takes into account the potential for the acquisition of additional minority shareholdings in addition to Vivendi's 53% stake, Etisalat's projected gross debt to EBITDA ratios is not expected to exceed 2.0x over the mid to long term. This is commensurate with management's conservative financial policy of 2.5x and remains well within Fitch's guidelines for a negative rating action.

Strong Liquidity Profile

Fitch expects liquidity to remain adequate for the current rating category, underpinned by the company's large cash balances of c. AED11bn in H113 (AED13.9bn in 2012) as well as strong cash flow generation in the UAE and certain foreign subsidiaries, despite the expected increase in leverage following MT's acquisition. In Fitch's view, this will enable the company to comfortably service its debt obligations over the medium term. Fitch also notes that Etisalat's liquidity profile is supported by the AED2.3bn availability under its undrawn committed credit facilities of as of H113.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

- An upgrade of the sovereign rating could be positive for the company's rating

Negative: Future developments that could lead to negative rating action include:

- A downgrade of the sovereign rating or a reduction in the UAE government's existing stake in Etisalat could be negative for the rating

- Any change in the implied support, commitment, importance to and ownership by the UAE government would prompt a review of the ratings

- Aggressive acquisitions that breach gross debt/EBITDA of 2.5x without government intervention to lower it below such threshold in a relatively short time frame (6-12 months)

- Severe loss of market share in its domestic business

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