Fitch Ratings-London-25 August 2016

Fitch Ratings has affirmed UAE-based state-owned Emirates Telecommunications Group Company PJSC's (Etisalat) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. Its senior unsecured debt is also affirmed at 'A+'.

KEY RATING DRIVERS

Sovereign Linkage

Etisalat's rating is notched down on a top-down basis from the UAE's sovereign rating. This is driven by our assessment of strong legal, operational and strategy ties between the two, in accordance with Fitch's Parent and Subsidiary Linkage criteria. Etisalat plays an important part in the government's vision to make the UAE a competitive knowledge economy, while in Fitch's opinion, government support has been integral to the company's international expansion plans.

The UAE government currently owns 60.03% of Etisalat. In August 2015, the government passed a new law and amended Etisalat's articles of association. Etisalat became a public joint stock company, and foreigners may own up to 20% of its shares but have no voting rights.

Important to Fitch's assessment of government support, the government will retain control over major strategic decisions at Etisalat as it will be given a special share, which will grant it certain rights to approving and vetoing key decisions of the company. This includes approving mergers, allowing for the participation of a strategic investor, spinning off part of its commercial activities, approving ownership of more than 5% of the company's share capital by any shareholder and allowing the government's shareholding to drop below 51%.

Strong Domestic Position

Etisalat has a strong position in its domestic market where it generates the majority of the group's EBITDA (64% in 2Q16) and cashflow (75% of EBITDA less capex in 2Q16). Domestic revenue growth slowed to 2.1% in 1H16 from 6.2% in 2015 as the UAE macroeconomic environment has become more challenging. Higher costs impacted 1Q16 domestic EBITDA, which contracted 4% yoy, but the trend in 2Q16 improved as management imposed cost controls.

FX Limited International Growth

Revenue growth from Etisalat's international businesses in 2015 and 1H16 on a reported basis was hampered by negative FX movements. In 2Q16, consolidated revenue growth on a reported basis was 1%, but on a constant currency basis was a higher 3%. This negative FX impact was more noticeable in the company's operations in Pakistan (8% of revenue in 2Q16), and Egypt (also 8% of revenue in 2Q16). For Maroc Telecom Group (MT) of which Etisalat controls 53%, the FX impact was less severe in 1H16. We expect FX weakness to persist for the rest of 2016.

Leverage

Net debt-to-EBITDA and gross debt-to-EBITDA increased to 0.2x and 0.9x at end-June 2016 from zero and 0.83x at end-2015, respectively. Despite the increase, leverage is still low and commensurate with management's conservative financial policy and remains well within Fitch's guidelines for the current ratings. All of Etisalat's main operations generate positive cashflow (EBITDA less capex) but the domestic business is the main contributor. We expect free cash flow (FCF) generation to improve in 2017 and 2018 as current investment programmes are completed.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Etisalat include:

-Revenue stable in 2016 (on a reported basis), followed by low single-digit growth in 2017 and 2018;

-EBITDA margin around 49% in 2016-18;

-Capex-to-sales ratio declining gradually to 15% in 2017 from 20% in 2015 and

-Stable dividend policy.

RATING SENSITIVITIES

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

-An upgrade of the sovereign rating, accompanied by continuing strong government support of Etisalat

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

-A downgrade of the sovereign rating

-Adverse changes to the implied support, commitment and ownership by, as well as to the importance of the company, to the UAE government

-Significant acquisitions that breach gross debt/EBITDA of 2.5x without deleveraging below that level within 18-24 months, indicating weaker state support.

-Severe loss of market share in its domestic business

LIQUIDITY

Etisalat had AED21.3bn in available cash and AED19.3bn in total cash balances at end-2015 and end-2Q16, respectively. Approximately 83% of end-2015 cash balances were held in the UAE.

During 2015, Etisalat completed the disposal of its 85% stake in Zantel, the Tanzanian mobile operator, and in August 2016 completed the disposal of Canar, the Sudanese fixed line operator. We believe the company is less likely to make acquisitions during 2016 and 2017 and if there are any, we would expect the UAE government to provide explicit support to fund significant transactions.

Etisalat exhibits a long-term debt structure. The company has no more than 20% of debt maturing in any given year. Total debt stood at AED22bn at end-2015 and AED23.9bn at end-2Q16. At end-June 2016, 64% of the outstanding debt was at the Etisalat parent company, 62% of total debt was in the form of bonds (AED14.8bn), while 63% of total debt was in hard currencies (40% EUR and 23% USD).

-Ends-

Contact:

Principal Analyst
Samer Haydar
Associate Director
+971 4424 1240

Supervisory Analyst
Damien Chew, CFA
Senior Director
+44 20 3530 1424
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Committee Chairperson
Nikolai Lukashevich, CFA
Senior Director
+7 495 956 9968

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

© Press Release 2016