Saudi Telecom Co. assigned 'A+' Long-Term And 'A-1' short-term ratings; outlook stable

The ratings are supported by STC's leading market position in the recently liberalized Saudi fixed-line telecom market with a difficult to replicate national network, implicit state support, high operating profitability margins, and very strong cash flows. The ratings are constrained, however, by potential further regulatory changes, which may negatively affect the company's competitive position and market shares.

STC is 70% owned by the Saudi Arabian government and about a further 10% is owned by government-related entities. The company employs more than 23,000 people.

"STC is strategically important to the state as a provider of key communications infrastructure. Consequently, we have notched up the corporate credit rating by one notch from the stand-alone rating," said Standard & Poor's credit analyst Michael O'Brien.

The Saudi market offers the potential for STC to maintain its strong position through incremental growth in broadband connections, which is at a very low level. The ratings are further supported by the cash flows derived from its mobile telecom operation, Al Jawal, which had a 69% subscriber market share and a 75% revenue market share in the third quarter of 2007.

Negative rating factors include stagnant revenue growth in its fixed-line division, given fixed-to-mobile traffic substitution and low broadband penetration. In addition, substantial investment is required to further upgrade its fixed-line network, where legacy technologies have dominated the main revenue-generating assets.

Standard & Poor's expects that STC will remain committed to its conservative financial policy. However, significant investments in coming years could weaken cash flow protection ratios from their strong levels.

A more accelerated growth path - either organically or through acquisition - accompanied by a more aggressive financial policy, a substantial negative impact on the company's financial performance as a result of regulatory decisions, or intensification of competition could negatively affect the ratings. Upside for the ratings is limited at this stage, given the risks and dynamics associated with the telecom industry, including likely increased competition for STC in its domestic market and a willingness to increase leverage for potential foreign acquisitions.