Moody's assigns Aa2 to Etisalat, UAE

These are the first ratings that Moody's assigns to Etisalat and the first time that it rates a telecommunications company in the United Arab Emirates (UAE).

"Etisalat's Aa2 rating is underpinned by its strong market position in the UAE, its track record, including a string of acquisitions abroad, its high profitability and solid cash flow generation, in addition to its prudent financial strategy," says Martin Kohlhase, a Moody's Dubai/DIFC-based Assistant Vice President and lead analyst for Etisalat.

"At the same time, the rating takes into account a higher degree of competition following the opening of the local telecommunications market in 2006, the exposure to politically less stable countries as well as managing the growth by introducing new technologies and entering new territories," adds Mr Kohlhase.

According to Moody's, the rating also benefits from its relationship with the federal government of the UAE, which by law cannot own less than 60% and nominates seven out of eleven board members. In addition, the government is consulted prior to any large investment and M&A transaction and has in the past been politically and financially supportive. Moody's notes that Etisalat's dividend and royalty payments to the federal government represent a significant contribution to the government's annual budget.

Etisalat has operated for over 30 years since its inception in 1976 as the majority state-owned monopoly in the UAE. It has benefited from a secluded position given that the market was only moderately liberalized in 2006 with no third operator expected to gain a license over the next five years. This has allowed Etisalat's management to prudently employ excess cash flows after dividends and royalties to finance acquisitions and investments in the fast-growing telecoms markets of under-penetrated countries in Africa and South-East Asia. "The company's financial strength -- as evidenced by moderate Debt/Ebitda leverage of below one multiple, high interest coverage and strong Cash-Flow-to-Debt ratios -- position Etisalat alongside other Aa- and A-rated government-related entities in the sector," says Mr Kohlhase.

The rating outlook for Etisalat is stable and reflects Moody's expectation of an operating environment that continues to exhibit little volatility given the favourable regulatory regime and despite a new market entrant.
The rating at Aa2, the third-highest grade, is on par with the sovereign rating for the UAE. A rating upgrade is unlikely even if the sovereign and the underlying baseline credit assessment were both notched up by one grade. Negative rating pressure could result from an extended period of increased leverage close to or above management's stated comfort levels of Debt/Ebitda of 2.5 times, a decline in RCF/Debt to levels of mid 20s (%) as well as by an increase in competition from new market entrants, driving down profits and coverage metrics.