Fitch rates Emirates Telecom Corp. foreign currency IDR 'AA-'

The IDR reflects Etisalat's strong operational and strategic ties with the UAE government since the company is 60.03%-owned by the UAE, and it is stipulated by law that state ownership cannot go below 60%. The current rating factors in assumed government support for the company in line with the approach laid out in Fitch's criteria for parent and subsidiary rating linkage. The government views Etisalat, which was established in 1976, as a national champion and a strategic asset. Fitch understands the UAE government is fully behind the company's expansion plans and fully supports its business.

The rating also assumes the UAE will continue to be a major revenue and EBITDA contributor to Etisalat's consolidated financials in the long-term despite rising contribution from international investments. Its expansion into the MENA region, exploiting the company's cash-rich balance sheet as well as direct support from the UAE government in such investments, is also factored into the current rating. However, Fitch is confident management will maintain a conservative financial policy, with maximum gross debt/EBITDA of 2.5x. The Stable Outlook reflects Fitch's expectation that the UAE market, with a mobile penetration rate of 142%, will continue to grow, albeit at a slower pace, and existing international mobile operations in Egypt and Saudi Arabia will be the major catalyst for expansion.

The company has strong free cash flow; it has an EBITDA after capex of about Dhs12.5bn in 2007 and average 76% EBITDA margin in the last three years are the highest in the region. Etisalat has had a net cash position in the last three years (adjusted net cash at FYE07 of Dhs1.6bn), and the company's proven free cash flow generation capability in its domestic market will continue to boost its cash balance in the long-term. It has only provided a $100m guarantee for its subsidiary in Afghanistan and does not have any other off-balance sheet commitments. Fitch also notes that 80% of gross debt is located at the parent level. As Etisalat does not have full control over its major subsidiaries such as Mobily and PCTL, it only received dividends from these operations in 2006-2007.

The ratings also consider potential regulatory and competitive challenges in the local market, though Etisalat operates in a protected duopoly environment where both existing operators have significant state ownership. Fitch notes the entry of a third mobile operator into the UAE market in the form of foreign competition is unlikely in the medium-term.

Etisalat is the leading telecom player in the UAE with shares of 97% in fixed, 86% in mobile and 96% in internet subscribers as at YE07. The company has also invested in a large portfolio of international assets; greenfield licenses in Saudi Arabia (mobile license), Egypt (mobile license), and has a majority stake in pan-African mobile company, Atlantique Telecom, and a minority stake in integrated telecom operator, PTCL.