UAE-based Etisalat's Long-term foreign currency has been given Issuer Default Rating (IDR) at 'AA'- by Fitch Ratings, which indicates that the Outlook on the IDR is Stable.
Fitch's assessment of the sovereign's creditworthiness is clearly reflected by the ratings, given Etisalat's strong operational and strategic ties with the UAE government. It won't be wrong to say that very soon this will be the key driver of any potential rating actions.
Furthermore, Etisalat's strong ties with the UAE government are also reflected by the assessments since the company is 60.03%-owned by the UAE. It is predetermined by law that state ownership cannot go below 60%.
According to Fitch, for the company to achieve its target of becoming a major telecom operator, with seven out of 11 of the Board of Directors being government representatives, including the Chairman, the support from the government is very important.
Fitch is also of the viewpoint that 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 mature UAE market might see a further decline in market share and some increased pricing pressure due to competition with a mobile penetration rate of around 190% at FY08.
"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," said a source.
Fitch, without doubt, is confident that a conservative financial policy, with a maximum gross debt/EBITDA of 2.5x (FY08: 0.2x gross debt/EBITDA; 0.4x net cash/EBITDA), would be maintained by the management.
It should be noted however that 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, then a serious downward pressure could be experienced by the ratings.
"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," said the source.
However, Fitch says that there is almost no likelihood of the mentioned risk over the medium-term, and the agency will adopt the legal, operational and strategic links before taking any action, even if it occurs.
