Fitch Ratings has assigned Emirates Telecommunications Corporation’s (Etisalat) $7bn global medium-term notes programme and the EUR3.15bn equivalent senior notes issued under the programme final ‘A+’ ratings. The final rating assignment follows the receipt of final documentation confirming preliminary information reviewed.
The EUR3.15bn equivalent notes have been issued in tranches of EUR2.4bn and $1bn. The EUR-denominated notes will mature in 2021 (EUR1.2bn) and 2026 (EUR1.2bn), while the USD-denominated notes will mature in 2019 ($0.5bn) and 2024 ($0.5bn).
The issue proceeds, approximately EUR1bn higher than originally targeted by the company, are being used to refinance existing loans to fund the acquisition of Maroc Telecom (MT). This will improve Etisalat’s debt maturity profile given the fairly short tenor of these existing loans.
The notes are rated at the same level as Etisalat’s ‘A+’ IDR and senior unsecured rating as they constitute direct, unconditional and unsecured obligations of the issuer and rank pari passu and equally with all other unsecured obligations. Terms and conditions of the documentation include negative pledge and cross default provisions as well as limitations on the transfer of the UAE’s telecommunications license by Etisalat. No change of control provision is contemplated in the bond documentation should the Government of the UAE cease control of Etisalat. The notes are governed by English law.
KEY RATING DRIVERS
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. The small notching differential reflects Fitch’s assessment of strong legal, operational and strategic ties between the company and the state, in accordance with the agency’s Parent and Subsidiary Linkage criteria. It also reflects our view of limited risks of the links weakening. In Fitch’s opinion government support is integral to the company’s international expansion plans.
The UAE government currently owns 60.03% of Etisalat and, according to federal law, the government’s stake cannot fall below 60%.
Fitch believes the acquisition of MT represents a strategic fit within Etisalat’s wider portfolio of companies, including its existing African footprint. The contribution of MT will improve Etisalat’s international portfolio, which Fitch currently views as weak relative to its strong domestic business. This is largely attributable to Etisalat’s non-leading positions in certain markets that are characterised by intense competition and exposure to macro-related risks.
We believe that although MT has recently experienced a 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 likely to result in stable dividend flow for Etisalat over the next three years.
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 reported EBITDA (74% in 2013). While Etisalat’s ratings are supported by the its strong domestic market share, which is viewed as an important driver of the ratings, 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 free cash flow (FCF) margins, underpinned by the company’s above-sector average EBITDA margin.
Leverage to Increase
Fitch expects a significant increase in financial leverage upon completion of the fully debt-funded acquisition of MT. Under Fitch’s scenario analysis, Etisalat’s projected net debt to EBITDA is not expected to exceed 1.5x over the medium- to long-term. This is commensurate with management’s conservative financial policy and remains well within Fitch’s guidelines for the current ratings.
Positive: Future developments that could lead to positive rating actions include:
-An upgrade of the sovereign rating
Negative: Future developments that could lead to negative rating action include:
-A downgrade of the sovereign ratings or a reduction in the UAE government’s existing stake in Etisalat
-Adverse changes to the implied support, commitment and ownership by as well as to the importance of the company to the UAE government
-Aggressive acquisitions that breach gross debt to EBITDA of 2.5x without government intervention to lower leverage below this threshold within six to 12 months
-Severe loss of market share in its domestic business
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