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.
The IDR reflects the expectation that Etisalat’s management will maintain a conservative financial policy, with a maximum gross debt/EBITDA of 2.5 times (x), and continue to generate a substantial majority of group EBITDA (more than 75%) from the local UAE market through 2013. Fitch notes the growing pressure on group operating margins, but still sees the net cash position of the company and free cash flow (FCF) generation of the local UAE business as vital to the company’s international expansion plans in the medium term.
Etisalat’s IDR is based on 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 fall below 60%. Fitch’s approach – and top-down methodology – takes into account the assumed government support in line with Fitch’s parent and subsidiary rating linkage methodology. Fitch views government support as integral to the company’s international expansion plans.
The UAE mobile market is mature, with growth prospects mainly in mobile broadband, and the company’s international mobile operations in Egypt and Nigeria will be its major source of expansion. Fitch notes that falling average revenue per user (ARPU) mainly on the fixed-line and prepaid segment and operating margins in the local market – due to elevated competition from a more financially flexible Emirates Integrated Telecommunications Company in its fourth year of operations – will continue to pressure the group operating margins.
Etisalat operates in a protected duopoly environment in UAE where both existing operators are owned by the state, but the ratings also take into consideration other potential regulatory and competitive challenges in the local market, such as the introduction of mobile number portability in Q3-Q412. Fitch also does not expect the entry of a third mobile operator into the UAE market in 2012-2013.
Capex requirements for the international businesses have eased after the write-down of its investment in India. However, the company’s cash-circulation ability from international operations is limited as the company does not control its second most important asset Mobily of Saudi Arabia. Fitch expects Etisalat to streamline its international operations over the next few years and divest some of its small and little profit making operations. Fitch also takes comfort from the fact that despite exposure to higher operational & credit risk in countries such as Afghanistan, Nigeria and Egypt, the bulk of the revenues and EBITDA will come from the UAE market.
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